| – | On June 30, 2023, the publication of litigation, regulatory proceedingsUSD LIBOR (overnight and uncertain income tax matters to the extent that a current obligation exists, the losses are probable and can be reasonably estimated. Significant judgment is required in making these estimates12-month maturities) will cease and the Bank’s final liabilities may ultimatelycalculation methodology for USD LIBOR (1-month, 3-month and 6-month maturities) will be materially different. The Bank’s actual losses may differ materially from recognized amounts.Bank's Management, after its analysis, has concluded that there have been no significant changes in the estimates made at the end of the 2019 in relation to the probability of the obligations that the Bank has to meet as of December 31, 2020 due to the situation produced by COVID-19 pandemic.
- Lease term (see Note 2.lreformed and Note 15)
In determining the lease term, Bank’s Management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated).
- Discount rate for leases as a lessee (see Note 2.l and Note 15)
To determine the incremental borrowing rate, the Bank applies the Cross Section methodology, which consists of estimating the credit spread of the Bank based on the Credit Default Swaps information available from different entities. Under the Cross Section methodology, the following factors are considered to obtain the credit spread:
| ● | Economic sector,become non-representative. |
The breakdown by type of financial asset as of December 31, 2022 of the total contracts affected by the IBOR Reform whose maturity date will be after June 30, 2023 is as follows: | | | | | | | | Referenced to | | | Derivatives at | | | Loans at | | USD LIBOR | | | fair value (1) | | | amortized cost (2) | | | | | | | | | | Total affected contracts by the USD LIBOR Reform | | | 3,719 | | | 763 | | Total gross carrying amount of affected contracts | | | 2,946 | | | 33,488 | | | | | | | | | |
| ● | An assumption to represent that at least one factor described above, match with the factors related to the Bank. |
d)
(1) The notional amount of financial derivatives assets and liabilities as of December 31, 2022 was 718,980 and 730,886, respectively. Most of the contracts affected by the USD LIBOR Reform are adhered to the International Swaps and Derivatives Association (ISDA) Protocol and will transition automatically to the new reference rates. (2) The amount of loans at amortized cost excludes 233 million pesos of the allowance for impairment losses. For total loans impacted by the transition, 87% of the Bank’s customers have already been contacted at least once and the Bank’s management is in renegotiation process, as of December 31, 2022 31% of the loan portfolio referenced to USD LIBOR have already been transitioned. The operational transition in systems will take place after the interest period or after the cessation of USD LIBOR. As of December 31, 2022, the Bank has other financial instruments, including financial derivatives, loans and other assets referenced to the USD LIBOR with a maturity date prior to June 30, 2023. The Bank has no plans to modify these contracts prior to their contractual maturity; therefore, the Bank does not expect a significant impact arising from IBOR Reform relating to these contracts. As of December 31, 2022, the Bank has no contractual exposure to EONIA rate. In October 2020, the ISDA launched the fallbacks Protocol and Supplement for IBORs (effective 25 January 2021), and provided market participants with of new financial derivatives fallbacks of LIBORs (among others IBOR, such as EURIBOR) for current financial derivative contracts and for new contracts. Additionally, on 19 August 2021, ISDA launched a new protocol that allowed entities to incorporate a fallback to the EONIA as the rate applicable to collateral in ISDA collateral agreements (known as CSAs). The Bank has adhered to the protocol and intends to monitor whether its counterparties will also adhere. If this plan changes or there are counterparties who will not adhere to the protocol, the Bank will negotiate with them bilaterally about including new fallback clauses. f) Russian invasion of Ukraine and Russian sanctions During 2022, Russia launched a large-scale military action against Ukraine. The Russian military action has caused an ongoing humanitarian crisis as well as volatility in financial markets globally, heightened inflation, shortages and increases in the prices of energy, oil, gas and other commodities, as well as a new landscape in relation to international sanctions. In response to the Russian military action against Ukraine, several countries have imposed severe sanctions on Russia and Belarus, including freezing/blocking assets, targeting major Russian banks, the Russian Central Bank, and certain Russian companies and individuals, imposing export controls against Russia and Russian interests, as well as the disconnection of certain Russian banks from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system. The extent to which the conflict could ultimately impact the Bank's results will depend on future developments, including subsequent sanctions that could eventually affect negatively to some Bank’ customers (those more closely related to Russia or Ukraine). The Bank's Management has assessed the uncertainties caused by the current situation (high inflation, rise in interest rates, supply chain disruptions in more sensitive sectors, etc.) taking into account the best information available in order to anticipate the impact on the most relevant portfolios. As of December 31, 2022, the Bank has assessed that there are no relevant financial impacts from the Russian military action. g) Events after the reporting period The following significant events occurred from January 1, 2023 to the date on which these consolidated financial statements were authorized for issue: Merger of Banco Santander Mexico with Santander Consumo, S. A. de C. V. and Santander Servicios Especializados, S.A. de C.V. On December 22, 2021, Banco Santander México obtained the authorization from Banco Santander (Spain) to carry out a merger through absorption of Santander Consumo and Santander Servicios Especializados. Banco Santander México was the surviving entity, and the latter were the merged entities. On December 15, 2022, the Mexican Ministry of Finance and Public Credit (hereinafter, “SHCP” by its Spanish acronym) authorized the aforementioned merger with an effective date of January 1, 2023. Exchange Offers In February 2023, Banco Santander (Spain) began the process of simultaneous exchange offer in Mexico and the United States of America for all the Bank's shares listed in both countries. The objective of Banco Santander (Spain) is to repurchase all of the Bank's Series "B" shares and American Depositary Shares (ADSs) that are not already in its possession. Once the exchange offers are concluded, Banco Santander (Spain) intends to cancel the registration of the Series "B" shares in the CNBV and starts the delisting on the Mexican Stock Exchange, as well as withdraw the ADS from the listing on the New York Stock Exchange and withdraw the Series "B" shares and ADSs filed with the SEC. 2. Accounting policies The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows: a) Foreign currency transactions i. Functional currency The functional currency of all entities comprising the Bank is the Mexican Peso (hereinafter, peso or $). Therefore, all balances and transactions denominated in currencies other than the peso are deemed to be denominated in foreign currency. ii. Foreign currency In preparing the consolidated financial statements, transactions in currencies other than the Bank’s functional currency (foreign currencies) are recognized at the exchange rates prevailing at the dates of the transactions. Monetary items denominated in foreign currencies are retranslated to the functional currency at the rates prevailing at the consolidated balance sheet date. Non-monetary items carried at fair value in foreign currencies are retranslated to the functional currency at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. The Bank performs a large number of foreign currency transactions, mainly in USD. The transactions, assets and liabilities denominated in foreign currencies are translated to pesos based on the exchange rates published by the Mexican Central Bank. The “day-end” exchange rate used was $20.5075 per one USD and $19.5089 per one USD as of December 31, 2021 and 2022, respectively. iii. Recognition of exchange differences The exchange differences arising on the translation of foreign currency balances to the functional currency are recognized at their net amount under Exchange differences (net) in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized under Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement without distinguishing them from other changes in fair value and for exchange differences arising on non-monetary items measured at fair value through other comprehensive income, which are recognized under Valuation adjustments in other comprehensive income. b) Basis of consolidation i. Subsidiaries The consolidated financial statements incorporate the financial statements of Banco Santander México and entities (including structured entities) controlled by Banco Santander México together with its subsidiaries. Control is achieved when Banco Santander México has all of the following: | ● | has power over the reporting periodThe Bank continues to monitor the COVID-19 pandemic situation and will take further action as necessary in response to the economic disruption.
Additionally, there were no other events after the end of the reporting period and the date when the financial statements were authorized for issue to disclose or that represented an adjusting event.
2. Accounting policies
The accounting policies and measurement bases applied in preparing the consolidated financial statements were as follows:
a) Foreign currency transactions
i. Functional currency
The functional currency of all entities comprising the Bank is the Mexican Peso (hereinafter, peso or $). Therefore, all balances and transactions denominated in currencies other than the peso are deemed to be denominated in foreign currency.
ii. Foreign currency
In preparing the consolidated financial statements, transactions in currencies other than the Bank’s functional currency (foreign currencies) are recognized at the exchange rates prevailing at the dates of the transactions. Monetary items denominated in foreign currencies are retranslated to the functional currency at the rates prevailing at the consolidated balance sheet date. Non-monetary items carried at fair value in foreign currencies are retranslated to the functional currency at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
The Bank performs a large number of foreign currency transactions, mainly in USD. The transactions, assets and liabilities denominated in foreign currencies are translated to pesos based on the exchange rates published by the Mexican Central Bank.
The “Fix” (48-hour) exchange rate used was $18.8642 per one USD and $19.9087 per one USD as of December 31, 2019 and 2020, respectively.
iii. Recognition of exchange differences
The exchange differences arising on the translation of foreign currency balances to the functional currency are recognized at their net amount under Exchange differences (net) in the consolidated income statement, except for exchange differences arising on financial instruments at fair value through profit or loss, which are recognized under Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement without distinguishing them from other changes in fair value and for exchange differences arising on non-monetary items measured at fair value through other comprehensive income, which are recognized under Valuation adjustments in other comprehensive income.
b) Basis of consolidation
i. Subsidiaries
The consolidated financial statements incorporate the financial statements of Banco Santander México and entities (including structured entities) controlled by Banco Santander México together with its subsidiaries. Control is achieved when the Banco Santander México has all of the following:
| ● | has power over the investee; |
| ● | is exposed, or has rights, to variable returns from its involvement with the investee; andinvestee; |
| ● | is exposed, or has rights, to variable returns from its involvement with the investee; and |
| ● | has the ability to use its power to affect its returns. |
Banco Santander México reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When Banco Santander México has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. Banco Santander México considers all relevant facts and circumstances in assessing whether or not Banco Santander México’s voting rights in an investee are sufficient to give it power, including: | ● | the size of Banco Santander México’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; |
| ● | potential voting rights held by Banco Santander México, other vote holders or other parties; |
| ● | rights arising from other contractual arrangements; and |
| ● | any additional facts and circumstances that indicate that Banco Santander México has, or does not have, the current ability to direct the relevant activities of the investee unilaterally. Banco Santander México considers all relevant facts and circumstances in assessing whether or not Banco Santander México’s voting rights in an investee are sufficient to give it power, including: | ● | the size of Banco Santander México’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; |
| ● | potential voting rights held by Banco Santander México, other vote holders or other parties; |
| ● | rights arising from other contractual arrangements; and |
| ● | any additional facts and circumstances that indicate that Banco Santander México has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. |
Consolidation of a subsidiary begins when Banco Santander México obtains control over the subsidiary and ceases when Banco Santander México loses control of the subsidiary. Specifically, the results of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and other comprehensive income from the date Banco Santander México gains control until the date when Banco Santander México ceases to control the subsidiary.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with Banco Santander México’s accounting policies.
The financial statements of the subsidiaries are fully consolidated with those of Banco Santander México. Accordingly, all intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Bank are eliminated on consolidation.
Non-controlling interests in subsidiaries are identified separately from the Bank’s equity therein. Those interests of non-controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement istime that decisions need to be made, on an acquisition-by-acquisition basis. Other non-controlling interests are initially measuredincluding voting patterns at fair value. Subsequent to acquisition, the carrying amount of non-
controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in consolidated total equity.
The consolidated income statement and each component of other comprehensive income are attributed to the owners of the Bank and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if these results in the non-controlling interests having a deficit balance (see Note 27).
The share of third parties of the consolidated total equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 27). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement.
On acquisition of control of a subsidiary that meets the definition of a business, its assets, liabilities and contingent liabilities are recognized at their acquisition date fair value. Any excess of the acquisition cost, the amount recognized for non-controlling interests of the acquiree and the fair value of the acquirer’s previous held equity interest in the acquiree over the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 16). Negative differences are recognized in the consolidated income statement on the date of acquisition.
The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries for which control is lost during the year are included in the consolidated income statement from the beginning of the year to the date of disposal.
A listing of the subsidiaries included in the consolidated financial statements as of December 31, 2019 and 2020 is summarized in Note 49.
ii. Investments in associates and joint ventures (jointly controlled entities)shareholders’ meetings.
|
Consolidation of a subsidiary begins when Banco Santander México obtains control over the subsidiary and ceases when Banco Santander México loses control of the subsidiary. Specifically, the results of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and other comprehensive income from the date Banco Santander México gains control until the date when Banco Santander México ceases to control the subsidiary. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with Banco Santander México’s accounting policies. The financial statements of the subsidiaries are fully consolidated with those of Banco Santander México. Accordingly, all intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Bank are eliminated on consolidation. Non-controlling interests in subsidiaries are identified separately from the Bank’s equity therein. Those interests of non-controlling shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in consolidated total equity. The consolidated income statement and each component of other comprehensive income are attributed to the owners of the Bank and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if these results in the non-controlling interests having a deficit balance (see Note 27). The share of third parties of the consolidated total equity is presented under Non-controlling interests in the consolidated balance sheet (see Note 27). Their share of the profit for the year is presented under Profit attributable to non-controlling interests in the consolidated income statement. On acquisition of control of a subsidiary that meets the definition of a business, its assets, liabilities and contingent liabilities are recognized at their acquisition date fair value. Any excess of the acquisition cost, the amount recognized for non-controlling interests of the acquiree and the fair value of the acquirer’s previous held equity interest in the acquiree over the fair values of the identifiable net assets acquired are recognized as goodwill (see Note 16). Negative differences are recognized in the consolidated income statement on the date of acquisition. The results of subsidiaries acquired during the year are included in the consolidated income statement from the date of acquisition to year-end. Similarly, the results of subsidiaries for which control is lost during the year are included in the consolidated income statement from the beginning of the year to the date of disposal. A listing of the subsidiaries included in the consolidated financial statements as of December 31, 2021 and 2022 is shown in Note 49. ii. Investments in associated entities An associate is an entity over which the Bank has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.
The results, assets and liabilities of associated entities or joint ventures are incorporated in the consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, an investment in an associate is initially recognized in the consolidated balance sheet at cost and adjusted thereafter to recognize the Bank’s share of the consolidated income statement and other comprehensive income of the associate. When the Bank’s share of losses of an associate exceeds the Bank’s interest in that associate (which includes any long-term interests that, in substance, form part of the Bank’s net investment in the associate), the Bank discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Bank has incurred legal or constructive obligations or made payments on behalf of the associate. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate. On acquisition of the investment in an associate, any excess of the cost of the investment over the Bank’s share of the net fair value of the identifiable assets and liabilities of the investee is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Bank’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in the consolidated income statement in the period in which the investment is acquired. The requirements of IAS 36 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Bank’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. The Bank discontinues the use of the equity method from the date when the investment ceases to be an associate, or when the investment is classified as held for sale. When the Bank retains an interest in the former associate and the retained interest is a financial asset, the Bank measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IFRS 9. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, the Bank accounts for all amounts previously recognized in other comprehensive income in relation to that associate on the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by that associate would be reclassified to the consolidated income statement on the disposal of the related assets or liabilities, the Bank reclassifies the gain or loss from consolidated total equity to the consolidated income statement (as a reclassification adjustment) when the associate is disposed of. When the Bank reduces its ownership interest in an associate but the Bank continues to use the equity method, the Bank reclassifies to the consolidated income statement the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to the consolidated income statement on the disposal of the related assets or liabilities. When a Bank’s subsidiary transacts with an associate or a joint venture of the Bank, profits and losses resulting from the transactions with the associate are recognized in the consolidated financial statements only to the extent of interests in the associate that are not related to the Bank. The Bank applies IFRS 9, including the impairment requirements, to long-term interests in an associate to which the equity method is not applied and which form part of the net investment in the investee. Furthermore, in applying IFRS 9 to long-term interests, the Bank does not take into account adjustments to their carrying amount required by IAS 28 Investments in Associates and Joint Ventures (i.e. adjustments to the carrying amount of long-term interests arising from the allocation of losses of the investee or assessment of impairment in accordance with IAS 28). As of December 31, 2021 and also for 6 months during 2022, the Bank maintained an investment in an associated entity as detailed in Note 49.a. An investor measures an associate that is classified as held for sale at the lower of its carrying amount at the date of classification as held for sale and fair value less costs to sell. Equity accounting ceases once an associate is classified as held for sale. iii. Structured entities When the Bank incorporates entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes (also called structured entities since the voting or similar power is not a key factor in deciding who controls the entity), the Bank determines, using internal criteria and procedures and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated. These structured entities include securitization special purpose vehicles (SPV) and employee benefit trusts (EBT) established for employee share-based plans, which are consolidated as it is considered that the Bank exercise control over these structured entities. Share-based payments are discussed in Note 42.b, 42.c, 42.d. and 43.b iv. Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by Banco Santander México, liabilities incurred by Banco Santander México to the former owners of the acquiree and the equity interests issued by the Bank in exchange for control of the acquiree. Acquisition-related costs are recognized in the consolidated income statement as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that: | ● | deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits, respectively; |
| ● | liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of Banco Santander México entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 at the acquisition date; and |
| ● | assets (or disposal groups) that are classified as held for sale in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, an investment in an associate or a joint venture is initially recognized in the consolidated balance sheet at cost and adjusted thereafter to recognize the Bank’s share of the consolidated income statement and other comprehensive income of the associate or joint venture. When the Bank’s share of losses of an associate or a joint venture exceeds the Bank’s interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Bank’s net investment in the associate or joint venture), the Bank discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Bank has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Bank’s share of the net
fair value of the identifiable assets and liabilities of the investee is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Bank’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in the consolidated income statement in the period in which the investment is acquired.
The requirements of IAS 36 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Bank’s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairmentmeasured in accordance with IAS 36 as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.
The Bank discontinues the use of the equity method from the date when the investment ceases to be an associate or a joint venture, or when the investment is classified as held for sale. When the Bank retains an interest in the former associate or joint venture and the retained interest is a financial asset, the Bank measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IFRS 9. The difference between the carrying amount of the associate or joint venture at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture is included in the determination of the gain or loss on disposal of the associate or joint venture. In addition, the Bank accounts for all amounts previously recognized in other comprehensive income in relation to that associate or joint venture on the same basis as would be required if that associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by that associate or joint venture would be reclassified to the consolidated income statement on the disposal of the related assets or liabilities, the Bank reclassifies the gain or loss from consolidated total equity to the consolidated income statement (as a reclassification adjustment) when the associate or joint venture is disposed of.
When the Bank reduces its ownership interest in an associate or a joint venture but the Bank continues to use the equity method, the Bank reclassifies to the consolidated income statement the proportion of the gain or loss that had previously been recognized in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to the consolidated income statement on the disposal of the related assets or liabilities.
When a Bank’s subsidiary transacts with an associate or a joint venture of the Bank, profits and losses resulting from the transactions with the associate or joint venture are recognized in the consolidated financial statements only to the extent of interests in the associate or joint venture that are not related to the Bank.
The Bank applies IFRS 9, including the impairment requirements, to long-term interests in an associate or joint venture to which the equity method is not applied and which form part of the net investment in the investee.
Furthermore, in applying IFRS 9 to long-term interests, the Bank does not take into account adjustments to their carrying amount required by IAS 28 (i.e. adjustments to the carrying amount of long-term interests arising from the allocation of losses of the investee or assessment of impairment in accordance with IAS 28).
As of December 31, 2020, the Bank has a commercial alliance with SMPS Merchant Platform Solutions México, S.A. de C.V. (formerly, Elavon Merchant Services México, S. de R.L. de C.V.), in order to share
revenues and expenses jointly related to the merchant services. This commercial alliance is not material to the consolidated financial statements.
As of December 31, 2019, the Bank did not have any investment in associated entities.
As of December 31, 2020, the Bank made an investment in an associated entity as detailed in Note 49.a.
iii. Structured entities
When the Bank incorporates entities, or holds ownership interests therein, to enable its customers to access certain investments, or for the transfer of risks or other purposes (also called structured entities since the voting or similar power is not a key factor in deciding who controls the entity), the Bank determines, using internal criteria and procedures and taking into consideration the applicable legislation, whether control (as defined above) exists and, therefore, whether these entities should be consolidated.
These structured entities include securitization special purpose vehicles (SPV) and employee benefit trusts (EBT) established for employee share-based plans, which are consolidated as it is considered that the Bank exercise control over these structured entities.
Note 11.g contains information regarding securitized mortgage assets.
Share-based payments are discussed in Note 42.b, 42.c and 42.d.
iv. Business combinations
Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Bank, liabilities incurred by the Bank to the former owners of the acquiree and the equity interests issued by the Bank in exchange for control of the acquiree. Acquisition-related costs are recognized in the consolidated income statement as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that:
| ● | deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits, respectively;Standard. |
| ● | liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Bank entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 at the acquisition date; and |
| ● | assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 are measured in accordance with that Standard. |
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the
acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in the consolidated income statement as a bargain purchase gain.
When the consideration transferred by the Bank in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.
The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Other contingent consideration is remeasured to fair value at subsequent reporting dates with changes in fair value recognized in the consolidated income statement.
When a business combination is achieved in stages, the Bank’s interests previously held in the acquired entity are remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognized in the consolidated income statement. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to the consolidated income statement, where such treatment would be appropriate if that interest were disposed of.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Bank reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized at that date.
v.Business combinations under common control
A common control transaction is a transfer of net assets or an exchange of equity interests between entities under the control of the same parent. A common-control transaction has no effect on the Ultimate Parent’s consolidated financial statements. The net assets are derecognized by the transferring entity and recognized by the receiving entity at their historical carrying amounts. Any difference between the consideration paid or received and the carrying amounts of the net assets is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
vi.Changes in the Bank’s ownership interests in existing subsidiaries
Changes in the Bank’s ownership interests in subsidiaries that do not result in the Bank losing control over the subsidiaries are accounted for as equity transactions, no gain or loss is recognized in the consolidated income statement and the initially recognized goodwill is not remeasured. The carrying amounts of the Bank’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet and attributed to owners of the Bank.
When the Bank loses control of a subsidiary, a gain or loss is recognized in the consolidated income statement and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if the Bank
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in the consolidated income statement as a bargain purchase gain. When the consideration transferred by Banco Santander México in a business combination includes a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as ‘measurement period’ adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Other contingent consideration is remeasured to fair value at subsequent reporting dates with changes in fair value recognized in the consolidated income statement. When a business combination is achieved in stages, the Bank’s interests previously held in the acquired entity are remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognized in the consolidated income statement. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to the consolidated income statement, where such treatment would be appropriate if that interest were disposed of. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, Banco Santander México reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized at that date. v.Business combinations under common control A common control transaction is a transfer of net assets or an exchange of equity interests between entities under the control of the same parent. A common-control transaction has no effect on the Ultimate Parent’s consolidated financial statements. The net assets are derecognized by the transferring entity and recognized by the receiving entity at their historical carrying amounts. Any difference between the consideration paid or received and the carrying amounts of the net assets is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. vi.Changes in Banco Santander México’s ownership interests in existing subsidiaries Changes in Banco Santander México’s ownership interests in subsidiaries that do not result in Banco Santander México losing control over the subsidiaries are accounted for as equity transactions, no gain or loss is recognized in the consolidated income statement and the initially recognized goodwill is not remeasured. The carrying amounts of Banco Santander México’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet and attributed to owners of Banco Santander México. When Banco Santander México loses control of a subsidiary, a gain or loss is recognized in the consolidated income statement and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non- controlling interests. All amounts previously recognized in other comprehensive income in relation to that subsidiary are accounted for as if Banco Santander México had directly disposed of the related assets or liabilities of the subsidiary (i.e., reclassified to the consolidated income statement or transferred to another category of equity as specified/permitted by applicable IFRS). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. c) Definitions and classification of financial instruments i. Definitions A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Financial assets and financial liabilities are recognized when the Bank becomes a party to the contractual provisions of the financial instruments. An equity instrument is a contract that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities. A financial derivative is a financial instrument or other contract within the scope of IFRS with all three of the following characteristics: | ● | its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contractual provisions ofcontract (sometimes called the financial instruments.An equity instrument is a contract that evidences a residual interest in the assets of the issuing entity after deducting all of its liabilities.
A financial derivative is a financial instrument or other contract within the scope of IFRS with all three of the following characteristics:
| ● | its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the “underlying”); |
| ● | it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and“underlying”); |
| ● | it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and |
| ● | it is settled at a future date. |
Hybrid financial instruments are contracts that simultaneously include a non-derivative host contract together with a financial derivative, known as an embedded derivative, that is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone financial derivative. Compound financial instruments are contracts that simultaneously create for their issuer a financial liability and an equity instrument (such as convertible bonds, which entitle their holders to convert them into equity instruments of the issuer). The following transactions are not treated for accounting purposes as financial instruments: | ● | Investments in associated entities and joint ventures (see Note 49) |
| ● | Rights and obligations under employee benefit plans (see Note 24.c). |
| ● | Contracts and obligations relating to employee remuneration based on own equity instruments. |
ii. Classification of financial assets for measurement purposes Financial assets are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for sale or they relate to Cash and balances with the Central Bank or Hedging financial derivatives, which are reported separately. The classification criteria depends on the Bank’s business model for managing the financial assets and the contractual terms of its cash flows. The Bank reclassifies financial assets when, and only when, its business model for managing those financial assets changes. The business model reflects how the Bank manages the financial assets in order to generate cash flows. That is, whether the Bank’s objective is to collect the contractual cash flows from financial assets on specified dates that are solely payments of principal and interest (SPPI), or is to collect both the contractual cash flows and cash flows arising from the sale of financial assets. In determining the appropriate business models for a group of financial assets and assessing the SPPI requirements, the Bank takes into account the following factors: | ● | How key management personnel are assessed and are reported on the performance of the business model and the financial assets held in the business model. |
| ● | The risks that affect the performance of the business model (and the financial assets held in the business model) and, specifically, the way in which these risks are managed. |
| ● | How business managers are remunerated. |
| ● | The evaluation of the experience on how the cash flows of financial assets for measurement purposesFinancial assetswere collected.
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| ● | The frequency and volume of sales in previous years, as well as expectations of future sales. |
| ● | How certain contractual features are initially classified into the various categories used for management and measurement purposes, unless they have to be presented as Non-current assets held for saleconsidered (i.e., interest rate reset frequency, prepayment commissions, among others) that significantly affect future cash flows. |
| ● | The assessment of a compensation paid or they relatereceived on early termination that could result in cash flows that are not SPPI. |
Where the business model is to hold financial assets to collect contractual cash flows or to collect both the contractual cash flows and cash flows arising from the sale of financial assets, the Bank assesses whether the financial assets’ cash flows represent SPPI. In making this assessment (SPPI test), the Bank considers whether the contractual cash flows are consistent with a basic lending arrangement. Depending on these factors, the financial asset can be measured at amortized cost, at fair value through other comprehensive income (FVTOCI), or at fair value through profit or loss (FVTPL). IFRS 9 also establishes an option to designate a financial instrument at FVTPL, under certain conditions. Where the contractual terms of the cash flows introduce exposures to risk or volatility that are inconsistent with a basic lending arrangement, the related financial assets are classified and measured at FVTPL. Financial assets that do not meet the criteria for being classified and measured at amortized cost or FVTOCI are classified and measured at FVTPL. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are SPPI. iii. Classification of financial assets for presentation purposes Financial assets are classified by nature into the following items in the consolidated balance sheet: | - | Cash and balances with the Central Bank: cash balances and balances receivable including the compulsory deposits with the Central Bank. |
| - | Loans and advances to credit institutions: loans of any nature, including deposits and money market transactions, provided to credit institutions. |
| - | Loans and advances to customers: debit balances of all loans granted to customers by the Bank. |
| - | Debt instruments: bonds and other debt securities that represent a debt obligation for their issuer and that bear interest. |
| - | Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, other than investments in subsidiaries, associates or jointly controlled entities. |
| - | Trading derivatives: fair value in favor of the Bank or Hedgingof financial derivatives, which are reported separately.The classification criteria depends on the Bank’s business model for managing thedo not form part of hedge accounting, including embedded derivatives separated from hybrid financial assets and the contractual termsinstruments.
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| - | Hedging derivatives: fair value of its cash flows.The Bank reclassifies financial assets when, and only when, its business model for managing those financial assets changes.
The business model reflects howderivatives in favor of the Bank, manages theincluding embedded derivatives separated from hybrid financial assetsinstruments, designated as hedging instruments in order to generate cash flows. That is, whether the Bank’s objective is to collect the contractual cash flows from financial assets on specified dates that are solely payments of principal and interest (SPPI), or is to collect both the contractual cash flows and cash flows arising from the sale of financial assets.
In determining the appropriate business models for a group of financial assets and assessing the SPPI requirements, the Bank takes into account the following factors:
| ● | How key management personnel are assessed and reported on the performance of the business model and the financial assets held in the business model.hedge accounting. |
| ● | The risks that affect the performance of the business model (and the financial assets held in the business model) and, specifically, the way in which these risks are managed. |
| ● | How business managers are remunerated. |
| ● | The evaluation of the experience on how the cash flows of financial assets were collected. |
| ● | The frequency and volume of sales in previous years, as well as expectations of future sales. |
| ● | How certain contractual features are considered (i.e., interest rate reset frequency, prepayment commissions, among others) that significantly affect future cash flows. |
| ● | The assessment of a compensation paid or received on early termination that could result in cash flows that are not SPPI. |
iv. Classification of financial liabilities for measurement purposes Financial liabilities are initially classified into the various categories used for management and measurement purposes, unless they relate to hedging financial derivatives, which are reported separately. Financial liabilities are classified for measurement purposes into one of the following categories: Where the business model is to hold financial assets to collect contractual cash flows or to collect both the contractual cash flows and cash flows arising from the sale of financial assets, the Bank assesses whether the financial assets’ cash flows represent SPPI. In making this assessment (SPPI test), the Bank considers whether the contractual cash flows are consistent with a basic lending arrangement.
Depending on these factors, the financial asset can be measured at amortized cost, at fair value through other comprehensive income (FVTOCI), or
| - | Financial liabilities at fair value through profit or loss (FVTPL). IFRS 9 also establishes an option to designateloss: financial liabilities incurred for the purpose of generating a financial instrument at FVTPL, under certain conditions.
Whereprofit in the contractual terms of the cash flows introduce exposures to risk or volatility that are inconsistent with a basic lending arrangement, the related financial assets are classified and measured at FVTPL.
Financial assets that do not meet the criteria for being classified and measured at amortized cost or FVTOCI are classified and measured at FVTPL.
Financial assets with embedded derivatives are considerednear term from fluctuations in their entirety when determining whether their cash flows are SPPI.
iii. Classificationprices, financial derivatives not designated as hedging instruments and financial liabilities arising from the outright sale of financial assets for presentation purposes
Financial assets are classified by nature into the following items in the consolidated balance sheet:
| - | Cash and balances with the Central Bank: cash balances and balances receivable including the compulsory deposits with the Central Bank.acquired under reverse repurchase agreements, securities loans and sales of borrowed securities (short positions). |
| - | Loans and advances to credit institutions: loans of any nature, including deposits and money market transactions, provided to credit institutions. |
| - | Loans and advances to customers: debit balances of all loans granted to customers by the Bank. |
| - | Debt instruments: bonds and other debt securities that represent a debt obligation for their issuer and that bear interest. |
| - | Equity instruments: financial instruments issued by other entities, such as shares, which have the nature of equity instruments for the issuer, other than investments in subsidiaries, associates or jointly controlled entities. |
| - | Trading derivatives: fair value in favor of the Bank of financial derivatives, which do not form part of hedge accounting, including embedded derivatives separated from hybrid financial instruments. |
| - | Hedging derivatives: fair value of financial derivatives in favor of the Bank, including embedded derivatives separated from hybrid financial instruments, designated as hedging instruments in hedge accounting. |
iv. Classification
Additionally, financial liabilities are included in this category when such classification provides more relevant information regarding the financial liability, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring the liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Bank’s key management personnel. | - | Financial liabilities at amortized cost: financial liabilities, for measurement purposesFinancial liabilities are initially classified into the various categories used for managementirrespective of their instrumentation and measurement purposes, unless they relate to hedging financial derivatives, which are reported separately.
Financial liabilities are classified for measurement purposes into onematurity, not included in any of the following categories:
| - | Financial liabilities at fair value through profit or loss: financial liabilities incurred for the purpose of generating a profit in the near term from fluctuations in their prices, financial derivatives not designated as hedging instruments and financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements (reverse repos), securities loans and sales of borrowed securities (short positions).above-mentioned categories, which arise from the ordinary borrowing activities or financing received. |
| - | Other financial liabilities at fair value through profit or loss: financial liabilities are included in this category when such classification provides more relevant information regarding the financial liability, either because this eliminates or significantly reduces recognition or measurement inconsistencies (accounting mismatches) that would otherwise arise from measuring the liabilities or recognizing the gains or losses on them on different bases, or because a group of financial liabilities or financial assets and liabilities is managed and its performance is evaluated on a fair value basis, such as repurchase agreements, in accordance with a documented risk management or investment strategy, and information about the group is provided on that basis to the Bank’s key management personnel. Liabilities may only be included in this category on the date when they are incurred or originated. The changes in the fair value of other financial liabilities at FVTPL due to the Bank’s own credit risk are recognized in other comprehensive income. |
| - | Financial liabilities at amortized cost: financial liabilities, irrespective of their instrumentation and maturity, not included in any of the above-mentioned categories, which arise from the ordinary borrowing activities or financing received. |
v.
v.Classification of financial liabilities for presentation purposes Financial liabilities are classified by nature into the following items in the consolidated balance sheet: | - | Deposits: all repayable balances received in cash by the Bank, other than those classified as marketable debt securities and those having the substance of financial liabilities for presentation purposesFinancial liabilities are classified by nature into the following items in the consolidated balance sheet:
| - | Deposits: all repayable balances received in cash by the Bank, other than those classified as marketable debt securities and those having the substance of subordinated liabilities. This item also includes cash bonds and cash consignments received, the amount of which may be invested without restriction. |
Deposits are classified based on the type of depositor as follows:
| - | Deposits from the Central Bank: deposits and repurchase agreements of any nature with the Central Bank.which may be invested without restriction. |
Deposits are classified based on the type of depositor as follows: | - | Deposits from credit institutions: deposits of any nature, including credit received, money market transactions and repurchase agreements in the name of credit institutions. |
| - | Customer deposits: deposits and repurchase agreements. |
| - | Marketable debt securities: bonds and other debt represented by marketable securities, other than those having the substance of subordinated liabilities. |
| - | Trading derivatives: fair value of financial derivatives with a liability balance, including embedded derivatives separated from the host contract, which do not form part of hedge accounting. |
| - | Short positions: financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements, securities loans and sales of borrowed securities. |
| - | Subordinated liabilities: financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the component that has the consideration of financial liability of compound financial instruments issued by the Bank, which form part of the Bank’s capital management for regulatory purposes, but do not meet the requirements for classification as equity for accounting purposes. |
| - | Other financial liabilities: payment obligations having the nature of financial liabilities that are not included in any of the aforementioned categories, including liabilities under financial guarantee contracts. |
| - | Hedging derivatives: fair value of the Bank’s liability in respect of financial derivatives, including embedded derivatives separated from hybrid financial instruments, designated as qualified hedging instruments in hedge accounting. |
d) Measurement of financial assets and liabilities and recognition of fair value changes
In general, financial assets and liabilities are initially recognized at fair value, which, in the absence of evidence to the contrary, is deemed to be the transaction price. The amount initially recognized for financial instruments not measured at FVTPL is adjusted for transaction costs that are directly attributable to the
acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are recognized in the consolidated income statement.
If the fair value of a financial instrument at initial recognition differs from the transaction price, that financial instrument shall be accounted for at that date as follows:
| - | if that fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference between the fair value at initial recognition and the transaction price shall be recognized as a gain or loss.Central Bank: deposits and repurchase agreements of any nature with the Central Bank. |
| - | Deposits from credit institutions: deposits of any nature, including credit received, money market transactions and repurchase agreements in the name of credit institutions. |
| - | Customer deposits: deposits and repurchase agreements. |
| - | Marketable debt securities: bonds and other debt represented by marketable securities, other than those having the substance of subordinated liabilities. |
| - | Trading derivatives: fair value of financial derivatives with a liability balance, including embedded derivatives separated from the host contract, which do not form part of hedge accounting. |
| - | Short positions: financial liabilities arising from the outright sale of financial assets acquired under reverse repurchase agreements, securities loans and sales of borrowed securities. |
| - | Subordinated liabilities: financing received which, for the purposes of payment priority, ranks behind ordinary debt. This category also includes the component that has the consideration of financial liability of compound financial instruments issued by the Bank, which form part of the Bank’s capital management for regulatory purposes, but do not meet the requirements for classification as equity for accounting purposes. |
| - | Hedging derivatives: fair value of the Bank’s liability in respect of financial derivatives, including embedded derivatives separated from hybrid financial instruments, designated as qualified hedging instruments in hedge accounting. |
d) Measurement of financial assets and liabilities and recognition of fair value changes In general, financial assets and liabilities are initially recognized at fair value, which, in the absence of evidence to the contrary, is deemed to be the transaction price. The amount initially recognized for financial instruments not measured at FVTPL is adjusted for transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are recognized in the consolidated income statement. If the fair value of a financial instrument at initial recognition differs from the transaction price, that financial instrument shall be accounted for at that date as follows: | - | if that fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e., a Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference between the fair value at initial recognition and the transaction price shall be recognized as a gain or loss. |
| - | in all other cases, adjusted to defer the difference between the fair value at initial recognition and the transaction price. After initial recognition, that deferred difference shall be recognized as a gain or loss only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability. |
Financial assets and liabilities are subsequently measured at each period-end as follows: i. Measurement of financial assets Financial assets measured at fair value The fair value of a financial instrument on a given date is taken to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The most objective and common reference for the fair value of a financial instrument is the price that would be paid for it on an active and transparent active market (quoted price or market price). If there is no market price for a given financial instrument, its fair value is estimated on the basis of the price established in recent transactions involving similar instruments and, in the absence thereof, of valuation techniques commonly used by the international financial community, taking into account the specific features of the instrument to be measured and, particularly, the various types of risk associated with it. All financial assets are accounted for at the trade date. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Subsequent measurement of financial assets depends on the Bank’s business model for managing the financial assets and the cash flows characteristics of the financial asset. The Bank classifies its financial assets into three measurement categories: | - | Amortized cost: financial instruments under a business model whose objective is to collect principal and interest cash flows, over which there is no significant unjustified sales, fair value is not a key element in the management of these financial assets and contractual conditions give rise to cash flows on specific dates, which are SPPI. In this sense, unjustified sales are considered those other than those related to an increase in the credit risk of the asset; unanticipated funding needs (stress case scenarios). Additionally, the characteristics of its contractual cash flows represent substantially a “basic financing agreement”. Interest income from these financial assets is included in Interest income in the consolidated income statement using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in profit or loss. Foreign exchange gains and losses are presented in Exchange differences (net) and impairment |
| | losses are presented within Impairment losses on financial assets (net) in the consolidated income statement. |
| - | FVTOCI: financial instruments held in a business model whose objective is to collect principal and interest cash flows and the sale of these financial assets, where fair value is a key factor in their management. Additionally, the contractual cash flow characteristics substantially represent a “basic financing agreement”. Changes in the fair value are taken through other comprehensive income, except for the recognition of impairment gains and losses, interest income and foreign exchange gains and losses on the financial assets’ amortized cost, which are recognized in the consolidated income statement. |
When the financial assets are derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss and recognized in Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement. Interest income from these financial assets is included in Interest income in the consolidated income statement using the effective interest rate method. Any gain or loss arising on derecognition is recognized directly in the consolidated income statement. Foreign exchange gains and losses are presented in Exchange differences (net) and impairment losses are presented within Impairment losses on financial assets (net) in the consolidated income statement.
| - | FVTPL: financial instruments included in a business model whose objective is not obtained through the above-mentioned models, where fair value is a key factor in managing of these financial assets, and financial instruments whose contractual cash flow characteristics do not substantially represent a “basic financing agreement”. Changes in the fair value of financial assets at FVTPL are recognized in profit or loss and presented net within Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement in the period in which it arises. Interest income from these financial assets is included as a separate line item within the consolidated income statement in Interest income from financial assets at fair value through profit or loss using the effective interest rate method. |
Loans with different components
The Bank originates loans to hold to maturity and to collect and sell or sub-participate to other lenders, resulting
| - | FVTOCI: financial instruments held in a transfer of substantially all the risk and rewards and derecognition of the loan or portion of it. The Bank considers the activities of lending to hold and lending to collect and sell or sub-participate as two separate business models. Financial assets considered to be within a business model that has anwhose objective is to holdcollect principal and interest cash flows and the sale of these financial assets, where fair value is a key factor in their management. Additionally, the contractual cash flow characteristics substantially represent a “basic financing agreement”. Changes in the fair value are taken through other comprehensive income, except for the recognition of impairment gains and losses, interest income and foreign exchange gains and losses on the financial assets to collect contractual cash flowsassets’ amortized cost, which are accounted for at amortized cost. Financial assets considered to berecognized in the consolidated income statement. |
When the financial assets are derecognized, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss and recognized in Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement. Interest income from these financial assets is included in Interest income calculated using the effective interest method in the consolidated income statement using the effective interest rate method. Foreign exchange gains and losses are presented in Exchange differences (net) and impairment losses are presented within Impairment losses on financial assets on financial assets not at fair value through profit or loss (net) in the consolidated income statement. | - | FVTPL: financial instruments included in a business model that has anwhose objective to collectis not obtained through the above-mentioned models, where fair value is a key factor in managing of these financial assets, and financial instruments whose contractual cash flowsflow characteristics do not substantially represent a “basic financing agreement”. Changes in the fair value of financial assets at FVTPL are recognized in profit or loss and to sell or sub-participate to other lenders are accounted for at FVTOCI.Amortized costpresented net within Gains/(losses) on financial assets and effectiveliabilities (net) in the consolidated income statement in the period in which it arises. Interest income from these financial assets is included as a separate line item within the consolidated income statement in Other interest method
The amortized cost is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortizationand similar income using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any allowance for impairment losses. The gross carrying amount of a financial asset is the amortized cost of a financial asset before adjusting for any allowance for impairment losses.
The effective interest method is a method of calculating the amortized cost of a financial instrument and of allocating interest income over the relevant period.
The effective interest rate method.
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Loans with different components The Bank originates loans to hold to maturity and to collect and sell or sub-participate to other lenders, resulting in a transfer of substantially all the risk and rewards and derecognition of the loan or portion of it. The Bank considers the activities of lending to hold and lending to collect and sell or sub-participate as two separate business models. Financial assets considered to be within a business model that has an objective to hold the financial assets to collect contractual cash flows are accounted for at amortized cost. Financial assets considered to be within a business model that has an objective to collect contractual cash flows and to sell or sub-participate to other lenders are accounted for at FVTOCI. Amortized cost and effective interest method The amortized cost is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortization using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any allowance for impairment losses. The gross carrying amount of a financial asset is the amortized cost of a financial asset before adjusting for any allowance for impairment losses. The effective interest method is a method of calculating the amortized cost of a financial instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. The calculation does not consider expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. The calculation does not consider expected
credit losses and includes transaction costs, premiums or discounts and fees and basis points paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired (POCI) financial assets, the Bank calculates the credit-adjusted effective interest rate, which is calculated based on the amortized cost of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses in estimated future cash flows. Modification of contractual cash flows When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in cash flows that are substantially different, the modification does not result in derecognition. In which case, the Bank recalculates the gross carrying amount of the financial asset and recognizes a modification gain or loss in profit or loss. The gross carrying amount of the financial asset shall be recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset’s original effective interest rate or credit-adjusted effective interest rate for POCI financial assets. Modification of loans and advances to customers The Bank sometimes renegotiates, refinances or otherwise modifies the contractual cash flows of loans and advances to customers. When this happens, the Bank assesses whether or not the new terms are substantially different to the original terms. The Bank does this by considering, among others, the following factors: | ● | When the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows of a financial asset are renegotiated or otherwise modified andto amounts the renegotiation or modification does not result in cash flows that are substantially different, the modification does not result in derecognition. In which case, the Bank recalculates the gross carrying amount of the financial asset and recognizes a modification gain or loss in profit or loss. The gross carrying amount of the financial asset shallborrower is expected to be recalculated as the present value of the renegotiated or modified contractual cash flows that are discounted at the financial asset’s original effective interest rate or credit-adjusted effective interest rate for POCI financial assets.Modification of loans and advancesable to customers
The Bank sometimes renegotiates, refinances or otherwise modifies the contractual cash flows of loans and advances to customers. When this happens, the Bank assesses whether or not thepay.
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| ● | Whether any substantial new terms are substantially different tointroduced that affects the original terms. The Bank does this by considering, among others,risk profile of the following factors: | ● | When the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay. |
| ● | Whether any substantial new terms are introduced that affects the risk profile of the loan. |
| ● | Significant extension of the loan term when the borrower is not in financial difficulty. |
| ● | Significant change in the interest rate. |
| ● | Change in the currency the loan is denominated in. |
| ● | Insertion of collateral, other security or credit enhancement that significantly affect the credit risk associated with the loan. |
| ● | Significant extension of the loan term when the borrower is not in financial difficulty. |
| ● | Significant change in the interest rate. |
| ● | Change in the currency the loan is denominated in. |
| ● | Insertion of collateral, other security or credit enhancement that significantly affect the credit risk associated with the loan. |
| ● | The modification is such that the loan would no longer meet the SPPI test. |
Modification of loans and advances to customers in the context of COVID-19 pandemic
Given the potential impact of COVID-19 pandemic on customers’ payment capacity, the Bank implemented a Support Program, which includes the partial or total deferral of principal and/or interest payments for up to four months, with the possibility of extending it to two additional months, with respect to the total amount due from borrowers, without any interest charge.
The relief measures contained in the Support Program resulted in a modification to the contractual terms of the loans subject to the Support Program, that did not result in derecognition of the financial assets under IFRS 9.
Details on the modification gain or loss of financial assets are presented in Note 11.g.
Derecognition due to substantial modification of terms and conditions The Bank derecognizes a financial asset, such as a loan to a customer, when the terms and conditions have been changed or renegotiated to the extent that, substantially, it becomes a new loan, with the difference recognized in profit or loss, to the extent that an impairment loss has not already been recognized. The new financial asset is initially recognized at fair value. There is limited guidance in IFRS 9 with respect to determining whether a modification of a financial asset results in derecognition, hence this assessment is based on qualitative factors and may be subject to judgment. Interest income Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets measured at FVTPL, at FVTOCI and at amortized cost, except for: | - | POCI financial assets, for which the original credit-adjusted effective interest rate is applied to the amortized cost of the financial asset. |
| - | Financial assets that are not POCI but have subsequently become credit-impaired (or Stage 3), for which interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets measured at FVTPL, at FVTOCI and attheir amortized cost, except for: | - | POCI financial assets, for which the original credit-adjusted effective interest rate is applied to the amortized cost of the financial asset.cost. |
Debt instruments The Bank classifies financial debt instruments as follows: | - | Fair value through other comprehensive income: Financial assets that are not POCI but have subsequently become credit-impaired (or Stage 3), for which interest income is calculated by applying the effective interest rate to their amortized cost. |
Debt instruments classified as at FVTOCI
Debt instruments classified as at FVTOCI are initially measured at fair value plus transaction costs. Subsequently, changes in the carrying amount of these financial assets as a result of foreign exchange gains and losses, impairment losses and interest income calculated using the effective interest method are recognized in the consolidated income statement. The amounts that are recognized in the consolidated income statement are the same as the amounts that would have been recognized in the consolidated income statement, if these financial assets had been measured at amortized cost. All other changes in the carrying amount of these financial assets are recognized in other comprehensive income and accumulated under Valuation adjustments - Financial assets at fair value through other comprehensive income. When these financial assets are derecognized, the cumulative gains or losses previously recognized in other comprehensive income are reclassified to the consolidated income statement.
Equity
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| - | Fair value through profit or loss: Financial instruments The Bank designates at initial recognition and subsequently measures all equity instruments classified as at FVTPL unless the Bank elects to present irrevocably fair value gains and losses on equity instruments in other comprehensive income. Designation of equity instruments as at FVTOCI is not permitted if the equity investment is held for trading or if it is contingent consideration recognized by an acquirer in a business combination.
A financial asset is held for trading if:
| ● | it has been acquired principally for the purpose of selling it in the near term; or |
| ● | on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has evidence of a recent actual pattern of short-term profit-taking; or |
| ● | it is a financial derivative instrument (except for a financial derivative that is a financial guarantee contract or a designated and effective hedging instrument). |
Investments in equity instruments at FVTOCI are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair value with gains and losses arising from changesat the end of each reporting period. Changes in the fair value recognized in other comprehensive income under Valuation adjustments - Financial assetsof debt instruments at fair value through other comprehensive income. The cumulative gain or loss is not reclassified to profit or loss following the derecognition of the equity instrument including on disposal; fair value gains and losses on equity instruments are reclassified on derecognition to Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. The fair value gains and losses on equity instruments presented in other comprehensive income includes any related foreign exchange component.
Dividends on these investments in equity instrumentsFVTPL are recognized in profit or loss in accordance with IFRS 9, unless the dividends clearly represent a recovery of part of the cost of the investment. Dividends are included in Income from equity instruments in the consolidated income statement.
As of December 31, 2019 and 2020, there were no significant investments in quoted financial instruments that had ceased to be recognized at their quoted price because their market could not be deemed to be active.
Financial derivatives
All financial derivatives are recognized in the consolidated balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. In the absence of evidence to the contrary, the fair value on the trade date is deemed to be the transaction price. The changes in the fair value of financial derivatives from the trade date are recognized inpresented net within Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement in the period in which it arises.
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Equity instruments The Bank designates at initial recognition and subsequently measures all equity instruments as at FVTPL, unless the Bank elects to present irrevocably fair value gains and losses on equity instruments in other comprehensive income. Designation of equity instruments as at FVTOCI is not permitted if the equity investment is held for trading or if it is contingent consideration recognized by an acquirer in a business combination. A financial asset is held for trading if: | ● | it has been acquired principally for the purpose of selling it in the near term; or |
| ● | on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has evidence of a recent actual pattern of short-term profit-taking; or |
| ● | it is a financial derivative instrument (except for a financial derivative that is a financial guarantee contract or a designated and effective hedging instrument). |
Investments in equity instruments at FVTOCI are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair value with gains and losses arising from changes in fair value recognized in other comprehensive income under Valuation adjustments - Financial assets at fair value through other comprehensive income. The cumulative gain or loss is not reclassified to profit or loss following the derecognition of the equity instrument including on disposal; fair value gains and losses on equity instruments are reclassified on derecognition to Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. The fair value gains and losses on equity instruments presented in other comprehensive income includes any related foreign exchange component. Dividends on these investments in equity instruments are recognized in profit or loss in accordance with IFRS 9, unless the dividends clearly represent a recovery of part of the cost of the investment. Dividends are included in Income from equity instruments in the consolidated income statement. As of December 31, 2021 and 2022, there were no significant investments in quoted financial instruments that had ceased to be recognized at their quoted price because their market could not be deemed to be active. Financial derivatives All financial derivatives are recognized in the consolidated balance sheet at fair value from the trade date. If the fair value is positive, they are recognized as an asset and if the fair value is negative, they are recognized as a liability. In the absence of evidence to the contrary, the fair value on the trade date is deemed to be the transaction price. The changes in the fair value of financial derivatives from the trade date are recognized in Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement. Specifically, the fair value of financial derivatives traded in organized markets included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price. If for exceptional reasons the quoted price cannot be determined on a given date, these financial derivatives are measured using methods similar to those used to measure “over-the-counter” (OTC) financial derivatives. The fair value of OTC financial derivatives is determined using the most appropriate valuation techniques commonly used by the financial markets based on the characteristics of each financial instrument such as net present value, option pricing models and other methods. ii. Measurement of financial liabilities In general, financial liabilities are measured at amortized cost using the effective interest method, except for those included under Financial liabilities at fair value through profit or loss and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and basis points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortized cost of a financial liability. iii. Valuation techniques The following table shows a summary of the fair values as of December 31, 2021 and 2022 of the financial assets and liabilities indicated below, classified based on the various measurement methods used by the Bank to determine their fair value: | | | | | | | | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | Published | | | | | | | | | Published | | | | | | | | | | | Price | | | | | | | | | Price | | | | | | | | | | | Quotations | | | | | | | | | Quotations | | | | | | | | | | | in Active | | | | | | | | | in Active | | | | | | | | | | | Markets – | | | Internal | | | | | | Markets – | | | Internal | | | | | | | | Level 1 | | | Models | | | Total | | | Level 1 | | | Models | | | Total | | | | | | | | | | | | | | | | | | | | | | ASSETS: | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through profit or loss | | | 106,073 | | | 255,542 | | | 361,615 | | | 110,273 | | | 374,714 | | | 484,987 | | Financial assets at fair value through other comprehensive income | | | 250,631 | | | 145,198 | | | 395,829 | | | 303,319 | | | 12,230 | | | 315,549 | | Hedging derivatives | | | — | | | 11,248 | | | 11,248 | | | — | | | 10,181 | | | 10,181 | | | | | 356,704 | | | 411,988 | | | 768,692 | | | 413,592 | | | 397,125 | | | 810,717 | | LIABILITIES: | | | | | | | | | | | | | | | | | | | | Financial liabilities at fair value through profit or loss | | | 62,570 | | | 288,847 | | | 351,417 | | | 28,762 | | | 405,350 | | | 434,112 | | Hedging derivatives | | | — | | | 8,162 | | | 8,162 | | | — | | | 4,461 | | | 4,461 | | | | | 62,570 | | | 297,009 | | | 359,579 | | | 28,762 | | | 409,811 | | | 438,573 | |
The financial instruments at fair value determined based on published price quotations in active markets (Level 1) include government debt securities, private-sector debt securities, financial derivatives traded in organized markets, securitized assets, equity shares, short positions and fixed-income securities issued. In cases where price quotations cannot be observed, Bank’s Management makes its best estimate of the price that the market would set using its own internal models (valuation techniques). These internal models use data, based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). The use of observable market data assumes that markets are efficient and therefore the data that is derived therefrom is representative. The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments, or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the financial asset or paid to transfer the financial liability in an orderly transaction between market participants at the measurement date. Still, other internal models use unobservable data as inputs. Examples of such unobservable inputs and assumptions are as follows: | - | Correlation: Historical correlation between equity prices and foreign exchange rates is assumed for valuing quanto and composite options. |
| - | Dividends: The estimation for the dividend used as inputs in the internal models is based on the characteristicsdividend payments expected from the issuer companies. |
| - | Volatility of each financial instrument such as net present value, option pricing models and other methods. ii. Measurement of financial liabilities
In general, financial liabilities are measured at amortized cost using the effective interest method, except for those included under Financial liabilities at fair value through profit or loss, Other financial liabilities at fair value through profit or loss and financial liabilities designated as hedged items (or hedging instruments) in fair value hedges, which are measured at fair value.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortized cost of a financial liability.
iii. Valuation techniques
The following table shows a summary of the fair values as of December 31, 2019 and 2020 of the financial assets and liabilities indicated below, classified based on the various measurement methods used by the Bank to determine their fair value:
| | | | | | | | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | Published | | | | | | | | | Published | | | | | | | | | | | Price | | | | | | | | | Price | | | | | | | | | | | Quotations | | | | | | | | | Quotations | | | | | | | | | | | in Active | | | | | | | | | in Active | | | | | | | | | | | Markets – | | | Internal | | | | | | Markets – | | | Internal | | | | | | | | Level 1 | | | Models | | | Total | | | Level 1 | | | Models | | | Total | | | | | | | | | | | | | | | | | | | | | | ASSETS: | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through profit or loss | | | 111,259 | | | 156,868 | | | 268,127 | | | 178,165 | | | 326,189 | | | 504,354 | | Other financial assets at fair value through profit or loss | | | — | | | 79,927 | | | 79,927 | | | — | | | 70,356 | | | 70,356 | | Financial assets at fair value through other comprehensive income | | | 201,580 | | | 35,400 | | | 236,980 | | | 257,963 | | | 98,126 | | | 356,089 | | Hedging derivatives | | | — | | | 9,256 | | | 9,256 | | | — | | | 8,306 | | | 8,306 | | | | | 312,839 | | | 281,451 | | | 594,290 | | | 436,128 | | | 502,977 | | | 939,105 | | LIABILITIES: | | | | | | | | | | | | | | | | | | | | Financial liabilities at fair value through profit or loss | | | 324 | | | 153,276 | | | 153,600 | | | 15,338 | | | 286,138 | | | 301,476 | | Other financial liabilities at fair value through profit or loss | | | — | | | 273,725 | | | 273,725 | | | — | | | 211,514 | | | 211,514 | | Hedging derivatives | | | — | | | 7,523 | | | 7,523 | | | — | | | 19,078 | | | 19,078 | | | | | 324 | | | 434,524 | | | 434,848 | | | 15,338 | | | 516,730 | | | 532,068 | |
The financial instruments at fair value determined based on published price quotations in active markets (Level 1) include government debt securities, private-sector debt securities, financial derivatives traded in organized markets, securitized assets, equity shares, short positions and fixed-income securities issued.
In cases where price quotations cannot be observed, Bank’s Management makes its best estimate of the price that the market would set using its own internal models (valuation techniques). These internal models use data, based on observable market parameters as significant inputs (Level 2) and, in very specific cases, they use significant inputs not observable in market data (Level 3). The use of observable market data assumes that markets are efficient and therefore the data that is derived therefrom is representative.
The best evidence of the fair value of a financial instrument on initial recognition is the transaction price, unless the fair value of the instrument can be obtained from other market transactions performed with the same or similar instruments or can be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.
The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.
Still, other internal models use unobservable data as inputs. Examples of such unobservable inputs and assumptions are as follows:
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| Correlation: Historical correlation between equity prices and foreign exchange rates is assumed for valuing quanto and composite options.
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| Dividends: The estimation for the dividend used as inputs in the internal models is based on the dividend payments expected from the issuer companies.
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| Volatility:instruments: There is no liquid option market for certain long-term financial assets. For most Mexican underlying assets, the option market is for up to one year.
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| - | Interest rate curve for estimating the interest rate index known as the 91-day TIIE (Tasa de Interés Interbancaria de Equilibrio): There is no liquid market for interest rate swaps with 91-day TIIE (Tasa de Interés Interbancaria de Equilibrio): There is no liquid market for interest rate swaps with 91-day payment terms. For these fair value measurements, the 28-day interest rate swaps curve is used instead. |
| - | Long-term Mexican rate curve: There is no liquid market for estimating and discounting financial instruments with maturities equal or higher than 20 years. |
| - | Market credit spreads: For some counterparties there is no credit default swaps (CDS) market quotes from which it is possible to infer a credit spread curve, this aspect is common for most of the Mexican counterparties. When there is no credit default swaps quote, generic credit curves are used instead. These curves are inferred from a proxy of quoted market credit default swaps considering geography, sector and rating. |
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Whenever unobservable market data is used in valuation techniques, the valuation is adjusted considering unobservable assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. The Bank also adjusts the value of some financial assets when they have very low market trading volume, even when prices are available. Fair value measurements that incorporate significant unobservable inputs are classified as Level 3. Significant unobservable inputs are defined as inputs for which observable market data are not available and that are significant to the fair value measurement. Such inputs are developed using the best information available about assumptions that market participants would use when pricing the asset or liability. iv.Valuation of financial instruments General measurement bases The Bank has implemented a formal process for systematic valuation and management of financial instruments. The governance scheme for this process distributes responsibilities between two independent areas inside the Bank: Treasury (development, marketing and daily management of financial products and market data) and Risks (on a periodic basis, validation of pricing and valuation models and market data, computation of risk metrics, new transactions approval policies, management of market risk and implementation of fair value adjustment policies). The approval of new products follows a sequence of steps (request, development, validation, integration in systems and quality assurance) before the product is ready to be placed on the market. This process ensures that pricing systems have been properly reviewed and are stable before they are used. The related valuation techniques and inputs by asset class are as follows: | Long-term Mexican rate curve: There is no liquid market for estimating and discounting financial instruments with maturities equal or higher than 20 years.
| a. | Financial assets at FVTPL and at FVTOCI |
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The estimated fair value of these financial assets is determined using quoted prices or yield curves provided by the Bank´s pricing vendor. | Market credit spreads: For some counterparties there is no credit default swaps (CDS) market quotes from which it is possible to infer a credit spread curve, this aspect is common for most of the Mexican counterparties. When there is no credit default swaps quote, generic credit curves are used instead. These curves are inferred from a proxy of quoted market credit default swaps considering geography, sector and rating.
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Whenever unobservable market data is used in valuation techniques, the valuation is adjusted considering unobservable assumptions that market participants would use when pricing the asset or liability, including assumptions about risk.
The Bank also adjusts the value of some assets when they have very low market trading volume, even when prices are available.
Fair value measurements that incorporate significant unobservable inputs are classified as Level 3. Significant unobservable inputs are defined as inputs for which observable market data are not available
| b. | Loans and that are significantadvances to the fair value measurement. Such inputs are developed using the best information available about assumptions that market participants wouldcredit institutions and customers – reverse repurchase agreements |
The fair value is estimated by using the discounted cash flow (forward estimation) technique making use when pricing the asset or liability. iv.Valuation of financial instruments
General measurement bases
The Bank has implemented a formal process for systematic valuation and management of financial instruments. The governance scheme for this process distributes responsibilities between two independent areas inside the Bank: Treasury (development, marketing and daily management of financial products and market data) and Risks (on a periodic basis, validation of pricing models and market data, computation of risk metrics, new transactions approval policies, management of market risk and implementation of fair value adjustment policies).
The approval of new products follows a sequence of steps (request, development, validation, integration in systems and quality assurance) before the product is brought into production. This process ensures that pricing systems have been properly reviewed and are stable before they are used.
The related valuation techniques and inputs by asset class are as follows:
| a. | Financial assets at FVTPL and at FVTOCI |
The estimated fair value of these financial assets is determined using quoted prices or yield curves provided by the Bank´s pricing vendor.
| b. | Loans and advances to credit institutions and customers – reverse repurchase agreements |
The fair value is estimated by using the discounted cash flow (forward estimation) technique using the interest rates that are currently offered for loans and advances with terms similar to those of borrowers having a similar credit quality.
| c. | Loans and advances to customers at fair value through other comprehensive income |
The estimated fair value of these financial assets is calculated by a default estimation method. This method consists of: a) estimating the default probabilities through a bootstrapping method from market credit spreads to incorporate the credit risk in the risk interest rate and b) discounting the expected cash flow at risk interest rate through the applicable discount factor. Both steps use observable market data (yield curves and market credit spreads) which are provided by a price vendor. The model assumes a deterministic approximation for modelling the cancellation prepayment: it is assumed that the obligor has a rational behavior and will exercise at the best moment, and then it assumes that the cancellation will be total.
F-40 | d. | Short positions, deposits from the Central Bank and deposits from credit institutions and customers – repurchase agreements |
The fair value of these financial instruments is calculated by using the discounted cash flow (forward estimation) technique based on the current incremental lending rates for similar types of deposits having similar maturities.
Table of Contents | e. | Financial derivatives (assets and liabilities) |
The estimated fair value of futures contracts is calculated using the prices quoted on the Derivatives Exchange Markets (Mercado Mexicano de Derivados and Chicago Mercantile Exchange) of identical instruments.
If there are no quoted prices on the market (either direct or indirect) for a financial derivative instrument, the respective fair value estimates are calculated by using one of the following models and valuation techniques:
i. Non-closed formula solution
In the valuation of financial instruments permitting static hedging (such as loans
| c. | Loans and advances to customers at fair value through other comprehensive income |
The estimated fair value of these financial assets is calculated by a default estimation method. This method consists of: a) estimating the default probabilities through a bootstrapping method from market credit spreads to incorporate the credit risk in the risk interest rate and b) discounting the expected cash flow at risk interest rate through the applicable discount factor. Both steps use observable market data (yield curves and market credit spreads) which are provided by a price vendor. The model assumes a deterministic approximation for modelling the cancellation prepayment; it is assumed that the obligor has a rational behavior and will exercise at the best moment, and then it assumes that the cancellation will be total. | d. | Short positions, deposits from the Central Bank and deposits from credit institutions and customers – repurchase agreements |
The fair value of these financial instruments is calculated by using the discounted cash flow (forward estimation) technique based on the current incremental lending rates for similar types of deposits having similar maturities. | e. | Financial derivatives (assets and liabilities) |
The estimated fair value of futures contracts is calculated using the prices quoted on the Derivatives Exchange Markets (Mercado Mexicano de Derivados and Chicago Mercantile Exchange) of identical instruments. If there are no quoted prices on the market (either direct or indirect) for a financial derivative instrument, the respective fair value estimates are calculated by using one of the following models and valuation techniques: i. Non-closed formula solution In the valuation of financial instruments permitting static hedging (such as loans and advances to customers, deposits, forwards and swaps), the present value method (forward estimation) is used. This method consists of a) calculating the expected cash flows and b) discounting the expected cash flows at the risk interest rate through the applicable discount factor. Both steps use observable market data (yield curves, foreign exchange spot rates and so forth) which are provided by a market data supplier (price vendor). ii. Closed-formula solution | - | The Black-Scholes model and Black model are used for the valuation of plain vanilla options, the first for foreign exchange spot rates and so forth) which are provided bysecurities and the latter for interest rates. These models assume that the underlying price follows a lognormal distribution. |
| - | The Montecarlo method with the local volatility model is the market data supplier (price vendor).
ii. Closed-formula solution
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| The Black-Scholes model and Black model are used for the valuation of plain vanilla options, the first for foreign exchange and securities and the latter for interest rates. These models assume that the underlying price follows a lognormal distribution.
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| The Montecarlo method with the local volatility model is the market proxy or reference model to price a wider range of exotic equity products.
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| - | The partial differential equation method with the local volatility model is particularly appropriate to price and manage callable products and products including barrier features on a single underlying. This method is quicker, more stable and more precise than the standard Montecarlo method, but the latter is needed when the underlying is a basket. The local volatility models assume that share and index prices are log normally distributed and volatility is a deterministic function of time and the market price. |
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| The trinomial trees method is intended for American foreign exchange products, which can be canceled at any time throughout the life of the option. It assumes deterministic interest rates and represents the evolution of the underlying foreign exchange using the Black-Scholes model.
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| - | The trinomial trees method is intended for American foreign exchange products, which can be canceled at any time throughout the life of the option. It assumes deterministic interest rates and represents the evolution of the underlying foreign exchange using the Black-Scholes model. |
| - | The partial differential equation solver using a mixed volatility model is used for pricing barrier products in foreign exchange. The development of a mixed volatility model was motivated by some very sensitive barrier products (double-no-touch options), which were quoted in the market with prices in between those provided by a local volatility model and a pure stochastic volatility model. The mixed volatility model is a combination of both models, which provides a price between them. |
| f. | Marketable debt securities |
The fair value of these financial instruments is calculated by using the discounted cash flow (forward estimation) technique, based on the current incremental lending rates for similar types of deposits having similar maturities, for the debt obligation component and one of the financial derivatives valuation techniques for the embedded derivative component, which depends on the payoff. Valuation adjustment for counterparty risk or default risk The Credit Valuation Adjustment (CVA) is a valuation adjustment to OTC financial derivatives because of the risk associated with the credit exposure assumed with each counterparty. The CVA is calculated taking into account potential exposure with each counterparty in each future period. The CVA for a specific counterparty is equal to the sum of the CVA for all the periods. The following inputs are used to calculate the CVA: | ● | Expected exposure: mark-to-market (MtM) value for each transaction plus an add-on for the potential future exposure for each period. Mitigating factors such as collateral and netting agreements are taken into account, as well as a temporary impairment factor for financial derivatives with interim payments. |
| ● | Loss Given Default: percentage of final loss assumed in a counterparty credit event /default. |
| ● | Probability of Default: for cases where there is no market information, such as the CDS quoted spread curve, proxies based on companies holding exchange-listed CDS, in the same industry and with the same external ratings as the counterparty, are used. |
The Debt Valuation Adjustment (DVA) is a valuation adjustment similar to the CVA but, in this case, it arises because of the Bank’s own credit risk assumed by its counterparties in OTC financial derivatives. The CVA and DVA recognized as of December 31, 2021 amounted to 146 million pesos and 933 million pesos, respectively. The CVA and DVA recognized as of December 31, 2022 amounted to 252 million pesos and 856 million pesos, respectively. All financial instruments fair values are calculated on a daily basis. Set forth below are the financial instruments at fair value which measurement was based on internal models (Level 2 and Level 3) as of December 31, 2021 and 2022. | | | | | | | | | | | | Fair | Fair | | | | | Values | Values | | | | | Calculated | Calculated | | | | | Using Internal | Using Internal | Valuation Techniques | Key Inputs | | | Models as of | Models as of | | | | | 12/31/2021 | 12/31/2022 | | | | | Level 2 | Level 3 | Total | Level 2 | Level 3 | Total | | | | | | | | | | | | | ASSETS: | | | | | | | | | | Financial assets at fair value through profit or loss: | | 255,403 | 139 | 255,542 | 374,644 | 70 | 374,714 | | | | | | | | | | | | | Loans and advances to credit institutions – Reverse repurchase agreements | | 58,486 | — | 58,486 | 102,652 | — | 102,652 | Forward estimation (non-closed formula) | Interest rate yield curve | | | | | | | | | | | Loans and advances to customers – Reverse repurchase agreements | | 10,000 | — | 10,000 | 19,207 | — | 19,207 | Forward estimation (non-closed formula) | Interest rate yield curve | | | | | | | | | | | Debt and equity instruments | | 49,404 | — | 49,404 | 24,043 | — | 24,043 | Price vendor | Financial instruments with low trading volume or minimum marketability | Trading derivatives: | | | | | | | | | | | | | | | | | | | | Interest rate options | | 711 | — | 711 | 1,277 | — | 1,277 | Black model (closed-formula solution) | Interest rate yield curve and implied volatility surface | | | | | | | | | | | Market index options: | | 130 | — | 130 | 170 | — | 170 | | | | | | | | | | | | | European options | | 11 | — | 11 | — | — | — | Black model (closed-formula solution) | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface and dividend estimate | | | | | | | | | | | Quanto options | | 115 | — | 115 | 152 | — | 152 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate | | | | | | | | | | | Auto-callable | | 4 | — | 4 | 1 | — | 1 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate | | | | | | | | | | | Asian quanto | | — | — | — | 17 | — | 17 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate | | | | | | | | | | | Exchange rate options: | | 1,874 | — | 1,874 | 2,321 | — | 2,321 | | | | | | | | | | | | | European barrier | | — | — | — | 5 | — | 5 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | Barrier options | | — | — | — | 3 | — | 3 | Logarithmic stochastic local volatility with partial differential equation method | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | European options | | 1,874 | — | 1,874 | 2,313 | — | 2,313 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | Swaps | | 129,668 | 139 | 129,807 | 218,036 | 70 | 218,106 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Index and securities futures | | — | — | — | — | — | — | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Exchange rate futures | | 5,130 | — | 5,130 | 6,938 | — | 6,938 | Forward estimation (non-closed formula)
��� | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Financial assets at fair value through other comprehensive income: | | 141,088 | 4,110 | 145,198 | 11,230 | 1,000 | 12,230 | | | | | | | | | | | | | Debt instruments | | 141,088 | — | 141,088 | 11,230 | — | 11,230 | Price vendor | Financial instruments with low trading volume or minimum marketability. | | | | | | | | | | | Loans and advances to customers | | — | 4,056 | 4,056 | — | 946 | 946 | Forward estimation (non-closed formula) | Interest rate yield curve | | | | | | | | | | | Equity instruments | | — | 54 | 54 | — | 54 | 54 | Other | Value of shareholders’ equity | | | | | | | | | | | Hedging derivatives: | | 11,248 | — | 11,248 | 10,181 | — | 10,181 | | | | | | | | | | | | | Swaps | | 6,015 | — | 6,015 | 5,112 | — | 5,112 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Exchange rate forwards | | 5,233 | — | 5,233 | 5,069 | — | 5,069 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | | | 407,739 | 4,249 | 411,988 | 396,055 | 1,070 | 397,125 | | |
| | | | | | | | | | | | Fair | Fair | | | | | Values | Values | | | | | Calculated | Calculated | | | | | Using Internal | Using Internal | | | | | Models as of | Models as of | Valuation | | | | 12/31/2021 | 12/31/2022 | Techniques | Key Inputs | | | Level 2 | Level 3 | Total | Level 2 | Level 3 | Total | | | | | | | | | | | | | LIABILITIES: | | | | | | | | | | Financial liabilities at fair value through profit or loss: | | 288,741 | 106 | 288,847 | 405,296 | 54 | 405,350 | | | | | | | | | | | | | Deposits from the Central Bank – Repurchase agreements | | 23,002 | — | 23,002 | 31,055 | — | 31,055 | Forward estimation (non- closed formula solution) | Interest rate yield curve | | | | | | | | | | | Deposits from credit institutions – Repurchase agreements | | 17,846 | — | 17,846 | 22,818 | — | 22,818 | Forward estimation (non- closed formula solution) | Interest rate yield curve | | | | | | | | | | | Customer deposits – Repurchase agreements | | 114,078 | — | 114,078 | 119,769 | — | 119,769 | Forward estimation (non- closed formula solution) | Interest rate yield curve | | | | | | | | | | | Trading derivatives: | | | | | | | | | | | | | | | | | | | | Interest rate options | | 915 | — | 915 | 1,921 | — | 1,921 | Black model (closed-formula solution) | Interest rate yield curve and implied volatility surface | | | | | | | | | | | Market index options: | | 264 | — | 264 | 1,744 | — | 1,744 | | | | | | | | | | | | | European | | 29 | — | 29 | — | — | — | Black-Scholes model (closed-formula solution) | Interest rate yield curves, quoted equity prices, index levels, implied volatility surface and dividend estimate | | | | | | | | | | | Auto-callable | | 149 | — | 149 | 61 | — | 61 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate | | | | | | | | | | | Asian quanto | | — | — | — | 9 | — | 9 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate | | | | | | | | | | | Quanto options | | 86 | — | 86 | 1,674 | — | 1,674 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividend estimate | | | | | | | | | | | Exchange rate options: | | 2,063 | — | 2,063 | 2,278 | — | 2,278 | | | | | | | | | | | | | European barrier | | 5 | — | 5 | 32 | — | 32 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | European options | | 2,051 | — | 2,051 | 2,242 | — | 2,242 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | American barrier and touch options | | 7 | — | 7 | 4 | — | 4 | Mixed volatility model with partial differential equation method | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | Swaps | | 126,796 | 106 | 126,902 | 220,071 | 54 | 220,125 | Forward estimation (non- closed formula solution) | Interest rate yield curves and quoted exchange rates | | | | | | | | | | | Exchange rate futures | | 3,491 | — | 3,491 | 5,120 | — | 5,120 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Short positions: | | | | | | | | | | | | | | | | | | | | Debt instruments | | 27 | — | 27 | — | — | — | Forward estimation (non- closed formula solution) | Interest rate yield curve | | | | | | | | | | | Marketable debt securities | | 259 | — | 259 | 520 | — | 520 | Present value (non-closed formula solution) and Black-Scholes model with closed-formula solution | Interest rate yield curve, quoted
equity prices and index levels,
implied volatility surface, historical correlations and dividends estimation | | | | | | | | | | | Hedging derivatives: | | 8,162 | — | 8,162 | 4,461 | — | 4,461 | | | | | | | | | | | | | Swaps | | 7,924 | — | 7,924 | 3,576 | — | 3,576 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Exchange rate forwards | | 238 | — | 238 | 885 | — | 885 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates | | | 296,903 | 106 | 297,009 | 409,757 | 54 | 409,811 | | |
Some of the financial instruments of the fair-value hierarchy have identical or similar offsetting exposures to certain inputs, but in accordance with IFRS, are presented as gross assets and liabilities in the consolidated balance sheet. The measurements calculated through valuation techniques, might have other methods or assumptions than those related to interest rate risk, credit risk and foreign currency risk spreads, or their related correlations and volatilities. Nevertheless, Bank’s Management believes that the fair value of the financial assets and liabilities recognized in the consolidated balance sheet and the gains and losses arising from these financial instruments are reasonably stated. Financial instruments categorized in Level 3 Set forth below are the Bank’s financial instruments measured using unobservable market data as significant inputs of the internal models (Level 3): As of December 31, 2022, the financial instruments at FVTPL categorized in Level 3 hierarchy are the following: | - | Twelve cross currency swaps (CCS) USD/Peso (Nominal USD 55 million) and four interest rate swaps (IRS) over TIIE-28 (Nominal 620 million pesos) with a maturity above twenty years. Since there is no Mexican rates liquid market for estimating and discounting financial instruments with maturities equal or higher than twenty years, these CCS and IRS are categorized as Level 3 hierarchy. |
| - | One IRS 91-day TIIE (Nominal 20 million pesos). Since there is not a 91-day TIIE interest rate curve, these financial instruments is calculated by using the discounted cash flow (forward estimation) technique, based on the current incremental lending rates for similar types of deposits having similar maturities, for the debt obligation component and oneare classified into a Level 3 hierarchy. |
| - | Six loan (Nominal 889 million pesos) classified as part of the financial derivatives valuation techniques for the embedded derivative component, which depends on the payoff.
Valuation adjustment for counterparty risk or default risk
The Credit Valuation Adjustment (CVA) is a valuation adjustment“Held to OTC financial derivatives because of the risk associated with the credit exposure assumed with each counterparty.
The CVA is calculated taking into account potential exposure with each counterparty in each future period. The CVA for a specific counterparty is equal to the sum of the CVA for all the periods.
The following inputs are used to calculate the CVA:
| ● | Expected exposure: mark-to-market (MtM) value for each transaction plus an add-on for the potential future exposure for each period. Mitigating factors such as collateral and netting agreements are taken into account, as well as a temporary impairment factor for financial derivatives with interim payments. |
| ● | Loss Given Default: percentage of final loss assumed in a counterparty credit event /default. |
| ● | Probability of Default: for cases where there is no market information (the CDS quoted spread curve, etc.), proxies based on companies holding exchange-listed CDS, in the same industry and with the same external ratings as the counterparty, are used. |
The Debt Valuation Adjustment (DVA) is a valuation adjustment similar to the CVA but, in this case, it arises because of the Bank’s own credit risk assumed by its counterparties in OTC financial derivatives.
The CVAcollect and DVA recognized as of December 31, 2019 amounted to 265 million pesos and 1,321 million pesos, respectively. The CVA and DVA recognized as of December 31, 2020 amounted to 328 million pesos and 1,365 million pesos, respectively.
All financial instruments fair values are calculated on a daily basis.
During 2019, the Bank carried out a review of its financial instruments fair value valuation process with the purpose of increasing the observability of certain inputs and parameters used in its valuation techniques. Because of this review, the sensitivity for those non-observable risk factors, such as the long-term Mexican rate curve, is considered non-material with respect to the rest of the risk factors that are taken into accountsell” business model. In order to calculate the fair value of some financial instruments; consequently, they were reclassified fromthese loans, market credit spreads per counterparty are needed; but given that none counterparty granted with the loans have a market credit spread quote (CDS), a generic credit curve is used as a proxy to represent its credit risk. Therefore, these loans are categorized into a Level 3 to Level 2.hierarchy.
|
As of December 31, 2021, the financial instruments at FVTPL categorized in Level 3 hierarchy are the following: | Additionally, the Bank has reclassified from Level 2 to Level 3 certain-
| Six CCS USD/Peso (Nominal USD 38 million) and four IRS (Nominal 619 million pesos) with a maturity above twenty years. Since there is no Mexican rates liquid market for estimating and discounting financial instruments with underlyingmaturities equal or higher than twenty years, these CCS and IRS are classified into a Level 3 hierarchy. |
| - | One IRS 91-day TIIE (Nominal 20 million). Since there is not a 91-day TIIE interest rate curves thatcurve, these financial instruments are considered non-observableclassified into a Level 3 hierarchy. |
| - | One loan (Nominal 4,056 million pesos) classified as part of the “Held to collect and non-liquid inputssell” business model was granted to a small-medium size customer. In order to calculate the fair value of such financial instruments. This reclassification was originated since the developmentthis loan, market credit spreads per counterparty are needed; but given that this counterparty does not have a market credit spread quote (CDS), a generic credit curve is used as a proxy to represent its credit risk. Therefore, this loan is categorized into a Level 3 hierarchy. |
| - | The structure denominated as “Swaps Lock-In” that is composed of more robust toolsthree IRS, which are fully hedged in prepayment and analytic capabilitiesmarket risk (Nominal 7,500 million pesos). In case that are useful to classify the fair value hierarchy for financial instruments. The amount of financial instruments that was reclassified between levels is not significant to the total financial instruments per level.
Set forth below are the financial instruments at fair value which measurement was based on internal models (Level 2 and Level 3) as of December 31, 2019 and 2020.
| | | | | | | | | | | | Fair | Fair | | | | | Values | Values | | | | | Calculated | Calculated | | | | | Using Internal | Using Internal | Valuation Techniques | Key Inputs | | | Models as of | Models as of | | | | | 12/31/2019 | 12/31/2020 | | | | | Level 2 | Level 3 | Total | Level 2 | Level 3 | Total | | | | | | | | | | | | | ASSETS: | | | | | | | | | | Financial assets at fair value through profit or loss: | | 155,930 | 938 | 156,868 | 325,567 | 622 | 326,189 | | | | | | | | | | | | | Debt and equity instruments | | 5,593 | — | 5,593 | 30,019 | — | 30,019 | Price vendor | Financial instruments with low trading volume or minimum marketability. | Trading derivatives: | | | | | | | | | | | | | | | | | | | | Interest rate options | | 421 | — | 421 | 232 | — | 232 | Black model (closed-formula solution) | Interest rate yield curve and implied volatility surface | | | | | | | | | | | Market index options: | | 212 | 60 | 272 | 114 | — | 114 | | | | | | | | | | | | | European options | | 2 | — | 2 | 1 | — | 1 | Black model (closed-formula solution) | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface and dividends estimation | | | | | | | | | | | Best of options (Basket) | | — | — | — | — | — | — | Local volatility model with Montecarlo method | Interest rate yield curves, equity prices and index levels, implied volatility surface, historical correlations and dividends estimation | | | | | | | | | | | Quanto options | | 147 | 60 | 207 | 112 | — | 112 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation | | | | | | | | | | | Auto-callable | | — | — | — | 1 | — | 1 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation. | | | | | | | | | | | Asian (Quanto) | | 63 | — | 63 | — | — | — | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation | | | | | | | | | | | Exchange rate options: | | 993 | — | 993 | 3,879 | — | 3,879 | | | | | | | | | | | | | European barrier | | 1 | — | 1 | — | — | — | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | European options | | 992 | — | 992 | 3,879 | — | 3,879 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | Swaps | | 139,901 | 878 | 140,779 | 281,885 | 622 | 282,507 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Index and securities futures | | 10 | — | 10 | 48 | — | 48 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Exchange rate futures | | 8,800 | — | 8,800 | 9,390 | — | 9,390 | Forward estimation (non-closed formula) Black and Scholes model with trinomial tree method (American forwards) | Interest rate yield curve and quoted exchange rates and implied volatility surface | | | | | | | | | | | Other financial assets at fair value through profit or loss: | | 79,927 | — | 79,927 | 70,356 | — | 70,356 | | | | | | | | | | | | | Loans and advances to credit institutions – Reverse repurchase agreements | | 54,138 | — | 54,138 | 59,512 | — | 59,512 | Forward estimation (non-closed formula) | Interest rate yield curve | | | | | | | | | | | Loans and advances to customers – Reverse repurchase agreements | | 25,789 | — | 25,789 | 10,844 | — | 10,844 | Forward estimation (non-closed formula) | Interest rate yield curve | | | | | | | | | | | Financial assets at fair value through other comprehensive income: | | 32,525 | 2,875 | 35,400 | 98,126 | — | 98,126 | | | | | | | | | | | | | Debt instruments | | 32,469 | — | 32,469 | 98,072 | — | 98,072 | Price vendor | Financial instruments with low trading volume or minimum marketability. | | | | | | | | | | | Equity instruments | | 56 | — | 56 | 54 | — | 54 | Other | Value of shareholders’ equity | | | | | | | | | | | Loans and advances to customers | | — | 2,875 | 2,875 | — | — | — | Estimation of credit default probabilities from credit spreads | Interest rate yield curves and market credit spreads | | | | | | | | | | | Hedging derivatives: | | 9,256 | — | 9,256 | 8,306 | — | 8,306 | | | | | | | | | | | | | Swaps | | 4,768 | — | 4,768 | 4,294 | — | 4,294 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Exchange rate forwards | | 4,488 | — | 4,488 | 4,012 | — | 4,012 | Forward estimation (non-closed formula) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | | | 277,638 | 3,813 | 281,451 | 502,355 | 622 | 502,977 | | |
| | | | | | | | | | | | Fair | Fair | | | | | Values | Values | | | | | Calculated | Calculated | | | | | Using Internal | Using Internal | | | | | Models as of | Models as of | Valuation | | | | 12/31/2019 | 12/31/2020 | Techniques | Key Inputs | | | Level 2 | Level 3 | Total | Level 2 | Level 3 | Total | | | | | | | | | | | | | LIABILITIES: | | | | | | | | | | Financial liabilities at fair value through profit or loss: | | | | | | | | | | | | 152,485 | 791 | 153,276 | 285,648 | 490 | 286,138 | | | | | | | | | | | | | Trading derivatives: | | | | | | | | | | | | | | | | | | | | Interest rate options | | 467 | 8 | 475 | 306 | — | 306 | Black model (closed-formula solution) | Interest rate yield curve and implied volatility surface | | | | | | | | | | | Market index options: | | 81 | 60 | 141 | 648 | — | 648 | | | | | | | | | | | | | European | | 1 | — | 1 | 555 | — | 555 | Black-Scholes model (closed-formula solution) | Interest rate yield curves, quoted equity prices, index levels, implied volatility surface and dividends estimation | | | | | | | | | | | Auto-callable | | — | — | — | 4 | — | 4 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation | | | | | | | | | | | Best of options (Basket) | | — | — | — | — | — | — | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation | | | | | | | | | | | Quanto options | | 80 | 60 | 140 | 89 | — | 89 | Local volatility model with partial differential equation method | Interest rate yield curves, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation | | | | | | | | | | | Exchange rate options: | | 1,548 | — | 1,548 | 2,766 | — | 2,766 | | | | | | | | | | | | | European barrier | | 4 | — | 4 | 5 | — | 5 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | European options | | 1,344 | — | 1,344 | 2,761 | — | 2,761 | Black model (closed-formula solution) | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | American barrier and touch options | | 200 | — | 200 | — | — | — | Mixed volatility model with partial differential equation method | Interest rate yield curves, quoted exchange rates and implied volatility surface | | | | | | | | | | | Swaps | | 134,627 | 723 | 135,350 | 273,805 | 490 | 274,295 | Forward estimation (non- closed formula solution) | Interest rate yield curves and quoted exchange rates | | | | | | | | | | | | | | | | | | | | | Index and securities futures | | 18 | — | 18 | 33 | — | 33 | Forward estimation (non- closed formula solution) | Interest rate yield curves, quoted equity prices and index levels exchange rates | | | | | | | | | | | Exchange rate futures | | 6,625 | — | 6,625 | 8,063 | — | 8,063 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Short positions: | | | | | | | | | | | | | | | | | | | | Debt instruments | | 9,119 | — | 9,119 | 27 | — | 27 | Forward estimation (non- closed formula solution) | Interest rate yield curve | | | | | | | | | | | Other financial liabilities at fair value through profit or loss: | | 273,725 | — | 273,725 | 211,514 | — | 211,514 | | | | | | | | | | | | | Deposits from the Central Bank – Repurchase agreements | | 111,574 | — | 111,574 | 24,936 | — | 24,936 | Forward estimation (non- closed formula solution) | Interest rate yield curve | | | | | | | | | | | Deposits from credit institutions – Repurchase agreements | | 29,689 | — | 29,689 | 54,922 | — | 54,922 | Forward estimation (non- closed formula solution) | Interest rate yield curve | | | | | | | | | | | Customer deposits – Repurchase agreements | | 129,216 | — | 129,216 | 130,293 | — | 130,293 | Forward estimation (non- closed formula solution) | Interest rate yield curve | | | | | | | | | | | Marketable debt securities | | 3,246 | — | 3,246 | 1,363 | — | 1,363 | Present value (non-closed formula solution) and Black-Scholes model with closed-formula solution | Interest rate yield curve, quoted equity prices and index levels, implied volatility surface, historical correlations and dividends estimation | | | | | | | | | | | Hedging derivatives: | | 7,523 | — | 7,523 | 19,078 | — | 19,078 | | | | | | | | | | | | | Swaps | | 7,114 | — | 7,114 | 18,509 | — | 18,509 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates | | | | | | | | | | | Exchange rate forwards | | 409 | — | 409 | 569 | — | 569 | Forward estimation (non- closed formula solution) | Interest rate yield curve and quoted exchange rates | | | 433,733 | 791 | 434,524 | 516,240 | 490 | 516,730 | | |
Someany of the financial instrumentsIRS involved in this structure presents an un-wind event at any time (lock-in), the rest of the fair-value hierarchy have identical or similar offsetting exposures to certain inputs, butthem will be also un-winded; these terms are submitted in accordance with IFRS, are presented as gross assets and liabilitiesa contractual basis. The significant
|
materiality of this structure to the unobservable significant input (prepayment rate) leads to a Level 3 hierarchy. The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs: | | | | | | | | | | | | | | | | | | | | | | | Assets | | | | | | | | Trading | | | Equity | | | Loans and advances | | | | | | | | derivatives | | | instruments | | | to customers | | | Total | | | | | | | | | | | | | | | | Balance at January 1, 2020 | | | 938 | | | — | | | 2,875 | | | 3,813 | | Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | | | | Gains/(losses) on financial assets and liabilities (net) | | | (265) | | | — | | | — | | | (265) | | Purchases | | | 6 | | | — | | | — | | | 6 | | Transfers out | | | — | | | — | | | — | | | — | | New issuances | | | — | | | — | | | — | | | — | | Settlements | | | (57) | | | — | | | (2,875) | | | (2,932) | | Balance at December 31, 2020 | | | 622 | | | — | | | — | | | 622 | | Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | | | | Gains/(losses) on financial assets and liabilities (net) | | | (305) | | | — | | | — | | | (305) | | Purchases | | | — | | | — | | | — | | | — | | Transfers out | | | — | | | — | | | — | | | — | | New issuances | | | — | | | 54 | | | 4,056 | | | 4,110 | | Settlements | | | (178) | | | — | | | — | | | (178) | | Balance at December 31, 2021 | | | 139 | | | 54 | | | 4,056 | | | 4,249 | | Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | | | | Gains/(losses) on financial assets and liabilities (net) | | | (1) | | | — | | | — | | | (1) | | Purchases | | | — | | | — | | | 2,544 | | | 2,544 | | Transfers out | | | — | | | — | | | (1,598) | | | (1,598) | | New issuances | | | — | | | — | | | — | | | — | | Settlements | | | (68) | | | — | | | (4,056) | | | (4,124) | | Balance at December 31, 2022 | | | 70 | | | 54 | | | 946 | | | 1,070 | |
| | | | | | | | Liabilities | | | | | Trading | | |
| | derivatives | | | | | | | Balance at January 1, 2020 | | | (791) | | Total gains/losses recognized in the consolidated balance sheet.income statement: | F-54
| Table of Contents
| The measurements calculated through valuation techniques, might have other methods or assumptions than those related to interest rate risk, credit risk and foreign currency risk spreads, or their related correlations and volatilities. Nevertheless, Bank’s Management believes that the fair value of the
| | Gains/(losses) on financial assets and liabilities (net) | | | (8) | | Purchases | | | (369) | | Transfer out | | | 617 | | New issuances | | | — | | Settlements | | | 61 | | Balance at December 31, 2020 | | | (490) | | Total gains/losses recognized in the consolidated balance sheetincome statement: | | | | | Gains/(losses) on financial assets and the gains and losses arising from these financial instruments are reasonably stated.liabilities (net) | Financial instruments categorized in Level 3
| Set forth below are the Bank’s financial instruments measured using unobservable market data as significant inputs of the internal models (Level 3):
| As of277
| | Purchases | | | — | | Transfers out | | | 24 | | New issuances | | | — | | Settlements | | | 83 | | Balance at December 31, 2020,2021 | | | (106) | | Total gains/losses recognized in the consolidated income statement: | | | | | Gains/(losses) on financial instrumentsassets and liabilities (net) | | | 4 | | Purchases | | | — | | Transfers out | | | — | | New issuances | | | — | | Settlements | | | 48 | | Balance at FVTPL categorized in Level 3 hierarchy are the following: | - | Six cross currency swaps (CCS) USD/Peso (Nominal USD 39 million) and six interest rate swaps (IRS) (Nominal 772 million pesos) with a maturity above twenty years. Since there is no liquid market for estimating and discounting financial instruments with maturities equal or higher than twenty years, these CCS and IRS are categorized as Level 3 hierarchy. |
| - | Four IRS 91-day TIIE (Nominal 419 million pesos) and one 91-day TIIE interest rate option (Nominal 2,345 million pesos). Since there is not a 91-day TIIE interest rate curve, these financial instruments are classified into a Level 3 hierarchy. |
| - | The structure denominated as “Swaps Lock-In” that is composed of three IRS, which are fully hedged in prepayment and market risk (Nominal 7,500 million pesos). In case that any of the IRS involved in this structure presents an un-wind event at any time (lock-in), the rest of them will be also un-winded; these terms are submitted in a contractual basis. The significant materiality of this structure to the unobservable significant input (prepayment rate) leads to a Level 3 hierarchy. |
As of December 31, 2019, the financial instruments at FVTPL categorized in Level 3 hierarchy are the following:2022
| - | Five CCS USD/Peso (Nominal USD 40 million) and four IRS (Nominal 432 million pesos) with a maturity above twenty years. Since there is no liquid market for estimating and discounting financial instruments with maturities equal or higher than twenty years, these CCS and IRS are classified into a Level 3 hierarchy. | | | (54) | |
| - | Two CCS 91-day TIIE UDI/Peso (Nominal UDI 250 million), four IRS 91-day TIIE (Nominal 419 million pesos) and two 91-day TIIE interest rate options (Nominal 2,395 million pesos). Since there is not a 91-day TIIE interest rate curve, these financial instruments are classified into a Level 3 hierarchy. |
| - | One hundred and fifty eight equity options considering the “Solactive Deep Value World Index” (Solwdeep Index) as underlying (Nominal Euro 7 million). These financial instruments are embedded options of structured notes offered to the customers of the Bank. The significance of unobservable market input (unobservable market volatility) leads to categorize such financial instruments into a Level 3 hierarchy. |
| - | The structure denominated as “Swaps Lock-In” that is composed of three IRS, which are fully hedged in prepayment and market risk (Nominal 7,500 million pesos). In case that any of the IRS involved in this structure presents an un-wind event at any time (lock-in), the rest of them will be also un-winded; these terms are submitted in a contractual basis. The significant |
| | materiality of this structure to the unobservable significant input (prepayment rate) leads to a Level 3 hierarchy. |
| - | One loan (Nominal 2,865 million pesos) classified as part of the “Held to collect and sell” business model was granted to a small-medium size customer. In order to calculate the fair value of this loan, market credit spreads per counterparty are needed; but given that this counterparty does not have a market credit spread quote (CDS), a generic credit curve is used as a proxy to represent its credit risk. Therefore, this loan is categorized into a Level 3 hierarchy. |
The following table provides a reconciliation of the movement between opening and closing balances of Level 3 financial instruments, measured at fair value using a valuation technique with significant unobservable inputs:
| | | | | | | | | | | | | | | | | Assets | | | | | | | | Trading | | | Loans and advances | | | | | | | | derivatives | | | to customers | | | Total | | | | | | | | | | | | | Balance at January 1, 2018 | | | 251 | | | — | | | 251 | | Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | Gains/(losses) on financial assets and liabilities (net) | | | 543 | | | — | | | 543 | | Purchases | | | — | | | — | | | — | | Sales | | | — | | | — | | | — | | New issuances | | | — | | | 771 | | | 771 | | Settlements | | | — | | | — | | | — | | Balance at December 31, 2018 | | | 794 | | | 771 | | | 1,565 | | Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | Gains/(losses) on financial assets and liabilities (net) | | | 13 | | | — | | | 13 | | Purchases | | | 902 | | | — | | | 902 | | Transfer out | | | (771) | | | — | | | (771) | | New issuances | | | — | | | 2,875 | | | 2,875 | | Settlements | | | — | | | (771) | | | (771) | | Balance at December 31, 2019 | | | 938 | | | 2,875 | | | 3,813 | | Total gains/losses recognized in the consolidated income statement: | | | | | | | | | | | Gains/(losses) on financial assets and liabilities (net) | | | (265) | | | — | | | (265) | | Purchases | | | 6 | | | — | | | 6 | | Transfer out | | | — | | | — | | | — | | New issuances | | | — | | | — | | | — | | Settlements | | | (57) | | | (2,875) | | | (2,932) | | Balance at December 31, 2020 | | | 622 | | | — | | | 622 | |
|
|
|
|
|
|
|
| Liabilities
|
|
|
|
| Trading
|
|
|
|
| derivatives
|
|
|
|
|
|
| Balance at December 31, 2018
|
|
| (155)
|
| Total gains/losses recognized in the consolidated income statement:
|
|
|
|
| Gains/(losses) on financial assets and liabilities (net)
|
|
| —
|
| Purchases
|
|
| (791)
|
| Transfer out
|
|
| 155
|
| New issuances
|
|
| —
|
| Settlements
|
|
| —
|
| Balance at December 31, 2019
|
|
| (791)
|
| Total gains/losses recognized in the consolidated income statement:
|
|
|
|
| Gains/(losses) on financial assets and liabilities (net)
|
|
| (8)
|
| Purchases
|
|
| (369)
|
| Transfer out
|
|
| 617
|
| New issuances
|
|
| —
|
| Settlements
|
|
| 61
|
| Balance at December 31, 2020
|
|
| (490)
|
|
Unobservable inputs used in measuring fair value
The table below shows the effect as of December 31, 2020
Unobservable inputs used in measuring fair value The table below shows the effect as of December 31, 2022 on the fair value of the financial instruments classified as Level 3 of a reasonable change in the assumptions used in the valuation. | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
| Significant
|
|
| Range of Estimates
|
|
| Fair value Measurement
|
|
|
|
|
|
| Valuation
|
|
| Unobservable
|
|
| (weighted-average)
|
|
| Sensitivity to
| Financial Instrument
|
|
| Fair value
|
|
| Technique
|
|
| Input
|
|
| for Unobservable Input
|
|
| Unobservable Inputs
| Caps and floors (91-day TIIE)
|
|
| —
|
|
| Black model (closed-formula)
|
|
| Interest rate curve referenced to 91-day TIIE
|
|
| 91-day TIIE interest rate curve = 28-day TIIE interest rate curve + (-22 basis points, -1 basis points)
|
| | | | | | | | | | | | | | | | | |
| |
|
| |
|
| Significant |
|
| Range of Estimates |
|
| Fair value Measurement | | | | | | | Valuation | | | Unobservable | | | (weighted-average) | | | Sensitivity to | Financial Instrument |
|
| Fair value |
|
| Technique |
|
| Input |
|
| for Unobservable Input |
|
| Unobservable Inputs | Loan and advances to customers | | | 889 | | | Estimation of credit default probabilities from credit spreads | | | Market credit spread quotes (CDS) | | | Credit spread quote (250 basis points – 1,003 basis points) | | | A significant rating downgrade would result in a lower fair value | Cross currency swaps | | | 19 | | | Forward estimation (non-closed formula) | | | Long-term peso exchange rate (above 20 years) | | | Bid-offer spread IRS TIIE (6 basis points) CCS USD/Peso (4 basis points) | | | A significant decrease in 91-day TIIE interest rate curve would result in a higher fair value | Cross currency swaps
|
|
| 115
|
|
| Forward estimation (non-closed formula)
|
|
| Long-term peso exchange rate
(above 20 years)
|
|
| Bid-offer spread
IRS TIIE (5 basis points)
CCS USD/Peso (5 basis points)
|
|
| A significant decrease in long-term peso exchange rate would result in a lower fair value
| Swaps Lock-In
|
|
| 203
|
|
| Forward estimation (non-closed formula)
|
|
| Prepayment rate
|
|
| Prepayment rate 6% - 12%
|
|
| There is no impact in fair value since the market and prepayment risks are fully hedge
| Interest rate swaps
| |
| (186)
| |
| Forward estimation (non-closed formula)
| |
| Long-term peso exchange rate (above 20 years)
Interest rate curve referenced to 91-day TIIE
| |
| 91-day TIIE interest rate curve = 28-day TIIE interest rate curve + (-22 basis points, -1 basis points)
Bid-offer spread
IRS TIIE (5 basis points)
CCS USD/Peso (5 basis points)
IRS UDI/Peso (5 basis points - 20 basis points)
| |
| A significant decrease in 91-day TIIE interest rate curve would result in a higher fair value
The same scenario applied on long-term peso exchange rate would result in a lower fair value
| Interest rate swaps | | | (4) | | | Forward estimation (non-closed formula) | | | Long-term peso exchange rate (above 20 years)
Interest rate curve referenced to 91-day TIIE | | | 91-day TIIE interest rate curve = 28-day TIIE interest rate curve + (-5 basis points, 31 basis points) Bid-offer spread IRS TIIE (6 basis points) CCS USD/Peso (4 basis points) | | | A significant decrease in 91-day TIIE interest rate curve would result in a higher fair value
The same scenario applied on long-term peso exchange rate would result in a lower fair value
|
This effect was determined by applying the probable valuation ranges of the main unobservable inputs detailed in the following table: Although Bank’s Management believes that its estimates of fair value are appropriate, the use of different inputs could lead to different measures of fair value. As of December 31, 2022, the potential impact in the consolidated income statement of changing the main inputs used for the measurement of Level 3 financial instruments for other inputs, taking the highest (most favorable input) or lowest (least favorable) value of the range deemed reasonably possible, would be as follows: | | | | | | | | | | | Potential Impact on Consolidated | | | | | Income Statement as of | | | | | December 31, 2022 | | | | | Most | | | Least | | | | | Favorable | | | Favorable | | | | | Input | | | Input | | | | | | | | | | ASSETS: | | | | | | | | Cross currency swaps | | | 1 | | | (1) | | Loan and advances to customers | | | — | | | (10) | | LIABILITIES: | | | | | | | | Interest rate swaps | | | 1 | | | (1) | |
Cross currency swaps The least favorable scenario assumed the following: | - | The long-term peso interest rate curves (IRS and CCS USD/Peso) used to calculate the fair value were modified to add four basis points. This scenarios were determined by applying the probable valuation rangesfollowing: |
| | 0.95 percentile over a one-year historical period of the main unobservable inputs detailed indifference between the following table:
|
The most favorable scenario assumed the following:
Although Bank’s Management believes that its estimates of
| - | The long-term peso interest rate curves (IRS TIIE and CCS USD/Peso) used to calculate the fair value are appropriate,were modified to subtract four basis points. |
Interest rate swaps The least favorable scenario assumed the following: | - | The long-term peso interest rate curves (IRS and 28-day TIIE) used to calculate the use of different inputs could leadfair value were modified to different measures of fair value. As of December 31, 2020,subtract 16 basis points. These scenarios were determined by the potential impact in the consolidated income statement of changing the main inputs used for the measurement of Level 3 financial instruments for other inputs, taking the highest (most favorable input) or lowest (least favorable) valuefollowing: 0.95 percentile over a one-year historical period of the range deemed reasonably possible, would be as follows: | | | | | | | | | | | Potential Impact on Consolidated | | | | | Income Statement as of | | | | | December 31, 2020 | | | | | Most | | | Least | | | | | Favorable | | | Favorable | | | | | Input | | | Input | | | | | | | | | | ASSETS: | | | | | | | | Cross currency swaps | | | 5 | | | (4) | | LIABILITIES: | | | | | | | | Interest rate swaps | | | 2 | | | (1) | |
Cross currency swaps
difference between the bid-offer quotations of these interest rate curves divided by two. Regarding the IRS with an underlying of 91-day TIIE interest rate curve, in absence of an observable market interest rate curve referenced to 91-day TIIE interest rate curve, the corresponding fixing is used; thus, a set of historical spreads between the fixings is applied over the 28-day TIIE interest rate curve in order to estimate the corresponding curve. The least favorable scenario assumedwas determined considering the following: | - | The long-term peso interest rate curves (IRS and CCS USD/Peso) used to calculate the fair value were modified to add five basis points. This scenarios were determined by the following: 0.95 percentile over a one-year historical period of the difference between the bid-offer quotations of these market rates divided by two.higher spread over a one-year historical window and then applied to the 28-day TIIE interest rate curve. |
The most favorable scenario assumed the following: | - | The long-term peso interest rate curves (IRS and CCS USD/Peso) used to calculate the fair value were modified to add 16 basis points. Regarding the IRS with an underlying of 91-day TIIE interest rate curve, the most favorable scenario assumedwas determined considering the following: | - | The long-term peso interest rate curves (IRS TIIE and CCS USD/Peso) used to calculate the fair value were modified to substract five basis points.lower spread over a one year historical window and then applied to the 28-day TIIE interest rate curve. |
Loans and advances to customers The least favorable scenario assumed the following: | - | Stress of the credit spread equivalent to a downgrade of three notches to represent the possible volatility of assigning a proxy credit curve to the counterparty. For example, if the original counterparty’s rating is BBB+, then the stress rating results into BB+, employing an internal-external rating equivalency. |
There is no favorable scenario regarding these loans, since the greatest fair value of this financial asset is the total amount granted (value at par). The most favorable scenario assumed the following: | - | Stress of the credit spread equivalent to an upgrade of three notches to represent the possible volatility of assigning a proxy credit curve to the counterparty. Continuing with the prior example, the upgrade corresponds to an A+ rating. |
v. Sensitivity analysis As an alternative to the sensitivity analysis, the Bank uses a Value at Risk (VaR) technique. A detailed explanation about VaR technique and the main assumptions incorporated therein are Interest rate swaps
The least favorable scenario assumed the following:
| - | The long-term peso interest rate curves (IRS and 28-day TIIE) used to calculate the fair value were modified to add five basis points. This scenarios were determined by the following: 0.95 percentile over a one-year historical period of the difference between the bid-offer quotations of these interest rate curves divided by two. Regarding the IRS with an underlying of 91-day TIIE interest rate curve, in absence of an observable market interest rate curve referenced to 91-day TIIE interest rate curve, the corresponding fixing is used; thus, a set of historical spreads between the fixings is applied over the 28-day TIIE interest rate curve in order to estimate the corresponding curve. The least favorable scenario was determined considering the higher spread over a one-year historical window and then applied to the 28-day TIIE interest rate curve. |
The most favorable scenario assumed the following:
| - | The long-term peso interest rate curves (IRS and CCS USD/Peso) used to calculate the fair value were modified to substracts five basis points. Regarding the IRS with an underlying of 91-day TIIE interest rate curve, the most favorable scenario was determined considering the |
| | lower spread over a one year historical window and then applied to the 28-day TIIE interest rate curve. |
v. Sensitivity analysis
As an alternative to sensitivity analysis, the Bank uses a Value at Risk (VaR) technique. A detailed explanation about VaR technique and the main assumptions incorporated therein are described in Note 48. The VaR amounts as of December 31, 2020,
described in Note 48. The VaR amounts as of December 31, 2022, including all financial instruments in the trading book position of the Bank are as follows: | | | | | | | | | | | | | | | | | Average | | | High | | | Low | | | 12/31/2022 | | | | | | | | | | | | | | | | All financial instruments | | | 41 | | | 103 | | | 25 | | | 41 | | By category: | | | | | | | | | | | | | | Instruments sensitive to interest rate | | | 38 | | | 104 | | | 26 | | | 39 | | Instruments sensitive to equity market prices | | | 1 | | | 3 | | | 0 | | | 1 | | Instruments sensitive to foreign currency exchange rates | | | 15 | | | 36 | | | 2 | | | 19 | | Instruments sensitive to volatility movements | | | 10 | | | 68 | | | 3 | | | 6 | |
The Bank’s VaR should be interpreted in light of the limitations of the methodologies. These limitations include the following: | - | Historical data may not provide the best estimate of the joint distribution of risk factor changes in the trading book positionfuture and may fail to capture the risk of possible extreme adverse market movements, which have not occurred in the historical window used in the calculations. |
| - | VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day. |
| - | The Bank computes the VaR of the Bank are as follows: | | | | | | | | | | | | | | | | | Average | | | High | | | Low | | | 12/31/2020 | | | | | | | | | | | | | | | | All financial instruments | | | 165 | | | 378 | | | 55 | | | 74 | | By category: | | | | | | | | | | | | | | Instruments sensitive to interest rate | | | 86 | | | 187 | | | 30 | | | 73 | | Instruments sensitive to equity market prices | | | 5 | | | 29 | | | — | | | — | | Instruments sensitive to foreign currency exchange rates | | | 127 | | | 285 | | | 11 | | | 12 | | Instruments sensitive to volatility movements | | | 8 | | | 45 | | | 3 | | | 9 | |
The Bank’s VaR should be interpreted in lighttrading portfolios at the close of business and positions may change substantially during the course of the limitations of the methodologies. These limitations include the following:trading day.
| -
| Historical data may not provide the best estimate of the joint distribution of risk factor changes in the future and may fail to capture the risk of possible extreme adverse market movements, which have not occurred in the historical window used in the calculations.
|
| -
| VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day.
|
| -
| The Bank largely computes the VaR of the trading portfolios at the close of business and positions may change substantially during the course of the trading day.
|
| - | VaR using a 99% confidence level does not reflect the extent of potential losses beyond that percentile. |
These limitations and the nature of the VaR measure mean that the Bank can guarantee neither those losses will not exceed the VaR amounts indicated nor that losses in excess of the VaR amounts will not occur more frequently than once in one hundred business days. vi. Recognition of fair value changes Changes in the fair value of financial assets and liabilities are recognized in the consolidated income statement. A distinction is made between the changes resulting from the accrual of interest and similar items, (which are recognized under Interest income calculated using the effective interest method, Other interest and similar income or Interest expense and similar charges, as appropriate), and those arising for other reasons, which are recognized at their net amount under Gains/(losses) on financial assets and liabilities. The recognition of the adjustments due to changes in fair value arising from financial assets at FVTOCI are described in Note 2.d.i. vii.Hedging transactions The Bank uses financial derivatives for the following purposes: (i) to facilitate these instruments to customers who request them in the management of their market and credit risks (trading derivatives); (ii) to use these financial derivatives in the management of the risks of the Bank’s own positions and assets and liabilities (hedging derivatives); and (iii) to obtain gains from changes in the prices of these financial derivatives (trading derivatives). Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives. A financial derivative qualifies for hedge accounting if all the following conditions are met: | 1. | The financial derivative hedges one of the following three types of exposure: |
| a. | Changes in the fair value of certainassets and liabilities due to fluctuations in, among others, the interest rate and/or exchange rate to which the position or balance to be hedged is subject and firm commitments (fair value hedge); |
| b. | Changes in the estimated cash flows arising from financial assets and liabilities subjectand highly probable forecasted transactions (cash flow hedge); and |
| c. | The net investment in a foreign operation (hedge of a net investment in a foreign operation). |
| 2. | It is effective in offsetting exposure inherent in the hedged item throughout the expected term of the hedge, which means that: |
| a. | At the date of arrangement, the hedge is expected, under normal conditions, to thosebe highly effective (prospective effectiveness). |
| b. | There is sufficient evidence that the hedge was effective during the whole life of the hedged item (retrospective effectiveness). To this end, the Bank checks that the results of the hedge were within a range of 80% to 125% of the results of the hedged item. |
| 3. | There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this hedge was expected to be achieved and measured, if this is consistent with the Bank’s management of its own risks. |
The changes in value of financial instruments qualifying for hedge accounting are recognized as follows: | a. | In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized eitherdirectly in the consolidated income statement or in other comprehensive income. A distinction is made between the changes resulting from the accrual of interest and similar items which are recognized under Interest income, Interest income from financial assets at fair value through profit or loss or Interest expenses and similar charges in the consolidated income statement, as appropriate, and those arising for other reasons, which are recognized at their net amount under Gain/within Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement.The recognition of the adjustments due to changes in fair value arising from financial assets at FVTOCI are described in Note 2d.i.
vii.Hedging transactions
The Bank uses financial derivatives for the following purposes: (i) to facilitate these instruments to customers who request them in the management of their market and credit risks (trading derivatives); (ii) to use these financial derivatives in the management of the risks of the Bank’s own positions and assets and liabilities (hedging derivatives); and (iii) to obtain gains from changes in the prices of these financial derivatives (trading derivatives).
Financial derivatives that do not qualify for hedge accounting are treated for accounting purposes as trading derivatives.
A financial derivative qualifies for hedge accounting if all the following conditions are met:
| 1. | The financial derivative hedges one of the following three types of exposure: |
| a. | Changes in the fair value of assets and liabilities due to fluctuations in, among others, the interest rate and/or exchange rate to which the position or balance to be hedged is subject and firm commitments (fair value hedge); |
| b. | Changes in the estimated cash flows arising from financial assets and liabilities and highly probable forecasted transactions (cash flow hedge); and |
| c. | The net investment in a foreign operation (hedge of a net investment in a foreign operation). |
| 2. | It is effective in offsetting exposure inherent in the hedged item throughout the expected term of the hedge, which means that: |
| a. | At the date of arrangement, the hedge is expected, under normal conditions, to be highly effective (prospective effectiveness). |
| b. | There is sufficient evidence that the hedge was effective during the whole life of the hedged item (retrospective effectiveness). To this end, the Bank checks that the results of the hedge were within a range of 80% to 125% of the results of the hedged item. |
| 3. | There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this hedge was expected to be achieved and measured, if this is consistent with the Bank’s Management of its own risks. |
The changes in value of financial instruments qualifying for hedge accounting are recognized as follows:
| a. | In fair value hedges, the gains or losses arising on both the hedging instruments and the hedged items attributable to the type of risk being hedged are recognized directly in the consolidated income statement. |
| b. | In cash flow hedges, the effective portion of the change in value of the hedging instrument is recognized temporarily in other comprehensive income under Valuation adjustments - Cash flow hedges until the forecast transactions occur, when it is recognized in the consolidated income statement, unless, if the forecast transactions result in the recognition of non-financial assets or liabilities, it is included in the cost of the non-financial asset or liability. |
| c. | In hedges of a net investment in a foreign operation, the gains or losses attributable to the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in other comprehensive income under Valuation adjustments - Hedges of net investments in foreign operations until the gains or losses on the hedged item are recognized in the consolidated income statement. |
| d. | The ineffective portion of the gains or losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under Gain/(losses) on financial assets and liabilities in the consolidated income statement. |
If a financial derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the financial derivative is classified for accounting purposes as a trading financial derivative.
When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are amortized to the consolidated income statement at the effective interest rate recalculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity.
When cash flow hedge accounting is discontinued, any cumulative gain or loss on the hedging instrument recognized in other comprehensive income under Valuation adjustments - Cash flow hedges (from the period when the hedge was effective) remains in consolidated total equity item until the forecast transaction occurs, at which timetransactions occur, when it is recognized in the consolidated income statement, unless, if the transactionforecast transactions result in the recognition of non-financial assets or liabilities, it is no longer expectedincluded in the cost of the non-financial asset or liability.
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| c. | In hedges of a net investment in a foreign operation, the gains or losses attributable to occur,the portion of the hedging instruments qualifying as an effective hedge are recognized temporarily in which caseother comprehensive income under Valuation adjustments - Hedges of net investments in foreign operations until the cumulative gaingains or loss islosses on the hedged item are recognized immediately in the consolidated income statement.viii.
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| d. | The ineffective portion of the gains or losses on the hedging instruments of cash flow hedges and hedges of a net investment in a foreign operation are recognized directly under Gain/(losses) on financial assets and liabilities in the consolidated income statement. |
If a financial derivative designated as a hedge no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, the financial derivative is classified for accounting purposes as a trading financial derivative. When fair value hedge accounting is discontinued, the adjustments previously recognized on the hedged item are amortized to the consolidated income statement at the effective interest rate recalculated at the date of hedge discontinuation. The adjustments must be fully amortized at maturity. When cash flow hedge accounting is discontinued, any cumulative gain or loss on the hedging instrument recognized in other comprehensive income under Valuation adjustments - Cash flow hedges (from the period when the hedge was effective) remains in consolidated total equity item until the forecast transaction occurs, at which time it is recognized in the consolidated income statement, unless the transaction is no longer expected to occur, in which case the cumulative gain or loss is recognized immediately in the consolidated income statement. viii.Derivatives embedded in hybrid financial instruments Derivatives embedded in other financial instruments or in other host contracts are accounted for separately as financial derivatives if: i) their risks and characteristics are not closely related to those of the host contracts; ii) a separate instrument with the same terms would meet the definition of a financial derivative and iii) the hybrid contract is not measured at fair value through profit or loss. e) Derecognition of financial assets and liabilities The accounting treatment of transfers of financial assets depends on the extent to which the risks and rewards associated with the transferred assets are transferred to third parties: | 1. | If the Bank transfers substantially all the risks and rewards to third parties – unconditional sale of financial assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitization of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases – the transferred financial asset is derecognized and any rights or obligations retained or created in the transfer are recognized simultaneously. |
| 2. | If the Bank retains substantially all the risks and rewards associated with the transferred financial asset – sale of financial assets are transferredunder an agreement to third parties: | 1. | If the Bank transfers substantially all the risks and rewards to third parties – unconditional sale of financialrepurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, sale of financial assets under an agreement to repurchase them at their fair value at the date of repurchase, sale of financial assets with a purchased call option or written put option that is deeply out of the money, securitization of assets in which the transferor does not retain a subordinated debt or grant any credit enhancement to the new holders, and other similar cases – the transferred financial asset is derecognized and any rights or obligations retained or created in the transfer are recognized simultaneously. |
| 2. | If the Bank retains substantially all the risks and rewards associated with the transferred financial asset – sale of financial assets under an agreement to repurchase them at a fixed price or at the sale price plus interest, a securities lending agreement in which the borrower undertakes to return the same or similar assets, and other similar cases –, the transferred financial asset is not derecognized and continues to be measured by the same criteria as those used before the transfer. However, the following items are recognized: |
| a. | An associated financial liability, which is recognized for an amount equal to the consideration received and is subsequently measured at amortized cost, unless it meets the requirements for classification under Other financial liabilities at fair value through profit or loss in the consolidated balance sheet. |
| b. | The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability, without offsetting. |
| 3. | If the Bank neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset – sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases – the following distinction is made: |
| a. | If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized. | a. | An associated financial liability, which is recognized for an amount equal to the consideration received and is subsequently measured at amortized cost. |
| b. | The income from the transferred financial asset not derecognized and any expense incurred on the new financial liability, without offsetting. |
| 3. | If the Bank neither transfers nor retains substantially all the risks and rewards associated with the transferred financial asset – sale of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases – the following distinction is made: |
| a. | If the transferor does not retain control of the transferred financial asset, the asset is derecognized and any rights or obligations retained or created in the transfer are recognized. |
| b. | If the transferor retains control of the transferred financial asset, it continues to recognize it for an amount equal to its exposure to changes in value and recognizes a financial liability associated with the transferred financial asset. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value. |
Accordingly, financial assets are only derecognized when the rights to the cash flows they generate have expired or when substantially all the inherent risks and rewards have been transferred to third parties.
Financial liabilities are only derecognized when the obligations they generate have been extinguished, that is when the contractual obligations have been paid or cancelled, or have been expired.
The exchange between the Bank and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability, both discounted at the original effective interest rate of the original liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for an extinguishment, any costs of fees incurred are recognized as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.
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Accordingly, financial assets are only derecognized when the rights to the cash flows they generate have expired or when substantially all the inherent risks and rewards have been transferred to third parties. Financial liabilities are only derecognized when the obligations they generate have been extinguished, that is when the contractual obligations have been paid or cancelled, or have been expired. The exchange between the Bank and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability, both discounted at the original effective interest rate of the original liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for an extinguishment, any costs of fees incurred are recognized as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortized over the remaining term of the modified liability. f) Offsetting of financial instruments Financial asset and liability balances are offset, i.e., reported in the consolidated balance sheet at their net amount, only if the Bank currently have a legally enforceable right to set-off the recognized amounts and intend either to settle on a net basis or to realize the asset and settle the liability simultaneously. The disclosures set out in the tables below include financial assets and financial liabilities that: | ● | Are offset in the consolidated balance sheet at their net amount, only if the Bank currently have a legally enforceable right to set-off the recognized amounts and intend either to settle on a net basis or to realize the asset and settle the liability simultaneously.The disclosures set out in the tables below include financial assets and financial liabilities that:
| ● | Are offset in the consolidated balance sheet; or |
| ● | Are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the consolidated balance sheet. |
The similar agreements include financial derivative clearing agreements, global master repurchase agreements and global master securities lending agreements. Similar financial instruments include financial derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing and lending agreements. Financial instruments such as loans and advances to customers and deposits are not disclosed in the tables below unless they are offset in the consolidated balance sheet.
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The similar agreements include financial derivative clearing agreements, global master repurchase agreements and global master securities lending agreements. Similar financial instruments include financial derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing and lending agreements. Financial instruments such as loans and advances to customers and deposits are not disclosed in the tables below unless they are offset in the consolidated balance sheet. Financial derivative transactions are either transacted on an exchange or entered into under ISDA master netting agreements. In general, under ISDA master netting agreements in certain circumstances (e.g. when a credit event such as a default occurs) all outstanding transactions under the agreement are terminated. The termination value is assessed and only a single net amount is due or payable in settlement of all transactions. Repurchase agreements, reverse repurchase agreements, securities borrowing and lending agreements are covered by master agreements with netting terms similar to those of ISDA master netting agreements. The ISDA and similar master netting arrangements do not meet the criteria for offsetting in the consolidated balance sheet. This is because they create for the parties to the agreement a right of set-off of recognized amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Bank or the counterparties or following other predetermined events. In addition, the Bank does not intend to settle on a net basis or to realize the financial assets and settle the financial liabilities simultaneously. The Bank receives and gives collateral in the form of cash and debt securities in connection with the following transactions: | ● | Financial derivative transactions are either transacted on an exchange or entered into under ISDA master netting agreements. In general, under ISDA master netting agreements in certain circumstances (e.g. when a credit event such as a default occurs) all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single net amount is due or payable in settlement of all transactions.derivatives; |
| ● | Repurchase agreements and reverse repurchase agreements, securitiesagreements; and |
| ● | Securities lending and borrowing and lending agreements are covered by master agreements with netting terms similar to those of ISDA master netting agreements.The ISDA and similar master netting arrangements do not meet the criteria for offsetting in the consolidated balance sheet. This is because they create for the parties to the agreement a right of set-off of recognized amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Bank or the counterparties or following other predetermined events. In addition, the Bank does not intend to settle on a net basis or to realize the financial assets and settle the financial liabilities simultaneously.
The Bank receives and gives collateral in the form of cash and debt securities in connection with the following transactions:
| ● | Repurchase agreements and reverse repurchase agreements; and |
| ● | Securities lending and borrowing agreements. |
Such collateral is subject to standard industry terms including, when appropriate, an ISDA Credit Support Annex (CSA). This means that securities received/given as collateral can be pledged or sold during the term of the transaction but have to be returned on maturity of the transaction. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral. Such collateral is subject to standard industry terms including, when appropriate, an ISDA Credit Support Annex (CSA). This means that securities received/given as collateral can be pledged or sold during the term of the transaction but have to be returned on maturity of the transaction. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral.
The following financial assets are subject to offsetting, enforceable master netting arrangements and similar agreements: As of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | | | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | | | | | | | | financial liabilities | | | financial assets | | | | | | | | | | | | | | | | | | | | offset in the | | | presented in the | | | | | | | | | | | | | | | | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of Master | | | Financial instrument | | | Cash | | | Net | | | | | financial assets | | | sheet | | | balance sheet | | | Netting Agreements | | | collateral | | | collateral | | | amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial derivatives assets | | | 304,477 | | | — | | | 304,477 | | | (256,053) | | | (5,483) | | | (23,052) | | | 19,889 | | | | | | | | | | | | | | | | | | | | | | | | | Reverse repurchase agreements | | | 70,356 | | | — | | | 70,356 | | | (10,800) | | | (59,557) | | | — | | | (1) | | | | | | | | | | | | | | | | | | | | | | | | | Equity instruments (*) (see Note 9.a) | | | 107 | | | — | | | 107 | | | — | | | (137) | | | — | | | (30) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 374,940 | | | — | | | 374,940 | | | (266,853) | | | (65,177) | | | (23,052) | | | 19,858 | |
As of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | | | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | | | | | | | | financial liabilities | | | financial assets | | | | | | | | | | | | | | | | | | | | offset in the | | | presented in the | | | | | | | | | | | | | | | | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of Master | | | Financial instrument | | | Cash | | | Net | | | | | financial assets | | | sheet | | | balance sheet | | | Netting Agreements | | | collateral | | | collateral | | | amount | | | | | | | | | | | | | | | | | | | | | | | | | Financial derivatives assets | | | 161,003 | | | — | | | 161,003 | | | (128,590) | | | (5,736) | | | (16,759) | | | 9,918 | | | | | | | | | | | | | | | | | | | | | | | | | Reverse repurchase agreements | | | 79,927 | | | — | | | 79,927 | | | (2,944) | | | (76,592) | | | — | | | 391 | | | | | | | | | | | | | | | | | | | | | | | | | Equity instruments (*) (see Note 9.a) | | | 13 | | | — | | | 13 | | | — | | | (14) | | | — | | | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 240,943 | | | — | | | 240,943 | | | (131,534) | | | (82,342) | | | (16,759) | | | 10,308 | |
(*) As of December 31, 2019 and 2020, the financial instruments received as collateral in lending transactions amount to 14 million pesos and 137 million pesos, respectively, which are limited to the net equities lent under the aforementioned lending transactions.
The following financial liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements:
As of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | | | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | | | | | | | | financial assets | | | financial liabilities | | | | | | | | | | | | | | | | | | | | offset in the | | | presented in the | | | | | | | | | | | | | | | | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of Master | | | Financial instrument | | | Cash | | | Net | | | | | financial liabilities | | | sheet | | | balance sheet | | | Netting Agreements | | | collateral | | | collateral | | | amount | | | | | | | | | | | | | | | | | | | | | | | | | Financial derivatives liabilities | | | 305,189 | | | — | | | 305,189 | | | (256,053) | | | (5,306) | | | (27,954) | | | 15,876 | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | | 344,804 | | | — | | | 344,804 | | | (10,800) | | | (337,130) | | | — | | | (3,126) | | | | | | | | | | | | | | | | | | | | | | | | | Short positions - Securities loans (see Note 10.b) | | | 15,263 | | | — | | | 15,263 | | | — | | | (15,734) | | | — | | | (471) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 665,256 | | | — | | | 665,256 | | | (266,853) | | | (358,170) | | | (27,954) | | | 12,279 | |
As of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | | | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | | | | | | | | financial assets | | | financial liabilities | | | | | | | | | | | | | | | | | | | | offset in the | | | presented in the | | | | | | | | | | | | | | | | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of Master | | | Financial instrument | | | Cash | | | Net | | | | | financial liabilities | | | sheet | | | balance sheet | | | Netting Agreements | | | collateral | | | collateral | | | amount | | | | | | | | | | | | | | | | | | | | | | | | | Financial derivatives liabilities | | | 152,004 | | | — | | | 152,004 | | | (128,590) | | | (4,472) | | | (14,300) | | | 4,642 | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | | 270,479 | | | — | | | 270,479 | | | (2,944) | | | (191,422) | | | — | | | 76,113 | | | | | | | | | | | | | | | | | | | | | | | | | Short positions - Securities loans (see Note 10.b) | | | 8,280 | | | — | | | 8,280 | | | — | | | (8,809) | | | — | | | (529) | | | | | | | | | | | | | | | | | | | | | | | | | Short positions – Short sales | | | 77,657 | | | — | | | 77,657 | | | — | | | (77,824) | | | — | | | (167) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 508,420 | | | — | | | 508,420 | | | (131,534) | | | (282,527) | | | (14,300) | | | 80,059 | |
As of December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | | | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | | | | | | | | financial liabilities | | | financial assets | | | | | | | | | | | | | | | | | | | | offset in the | | | presented in the | | | | | | | | | | | | | | | | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of master | | | Financial instrument | | | Cash | | | Net | | | | | financial assets | | | sheet | | | balance sheet | | | netting agreements | | | collateral | | | collateral | | | amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial derivatives assets | | | 238,997 | | | — | | | 238,997 | | | (204,724) | | | (4,541) | | | (26,861) | | | 2,871 | | | | | | | | | | | | | | | | | | | | | | | | | Reverse repurchase agreements | | | 121,859 | | | — | | | 121,859 | | | (2,461) | | | (119,398) | | | — | | | — | | | | | | | | | | | | | | | | | | | | | | | | | Equity instruments (*) (see Note 9.a) | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 360,856 | | | — | | | 360,856 | | | (207,185) | | | (123,940) | | | (26,861) | | | 2,870 | |
As of December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | | | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | | | | | | | | financial liabilities | | | financial assets | | | | | | | | | | | | | | | | | | | | offset in the | | | presented in the | | | | | | | | | | | | | | | | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of master | | | Financial instrument | | | Cash | | | Net | | | | | financial assets | | | sheet | | | balance sheet | | | netting agreements | | | collateral | | | collateral | | | amount | | | | | | | | | | | | | | | | | | | | | | | | | Financial derivatives assets | | | 190,638 | | | — | | | 190,638 | | | (152,313) | | | (4,491) | | | (26,894) | | | 6,940 | | | | | | | | | | | | | | | | | | | | | | | | | Reverse repurchase agreements | | | 68,486 | | | — | | | 68,486 | | | (4,799) | | | (63,687) | | | — | | | — | | | | | | | | | | | | | | | | | | | | | | | | | Equity instruments (*) (see Note 9.a) | | | 9 | | | — | | | 9 | | | — | | | (74) | | | — | | | (65) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 259,133 | | | — | | | 259,133 | | | (157,112) | | | (68,252) | | | (26,894) | | | 6,875 | |
(*) As of December 31, 2021 and 2022, the financial instruments received as collateral in lending transactions amount to 74 million pesos and 1 million pesos, respectively, which are limited to the net equities lent under the aforementioned lending transactions. The following financial liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements: As of December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | | | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | | | | | | | | financial assets | | | financial liabilities | | | | | | | | | | | | | | | | | | | | offset in the | | | presented in the | | | | | | | | | | | | | | | | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of master | | | Financial instrument | | | Cash | | | Net | | | | | financial liabilities | | | sheet | | | balance sheet | | | netting agreements | | | collateral | | | collateral | | | amount | | | | | | | | | | | | | | | | | | | | | | | | | Financial derivatives liabilities | | | 235,649 | | | — | | | 235,649 | | | (204,724) | | | (7,077) | | | (15,676) | | | 8,172 | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | | 299,320 | | | — | | | 299,320 | | | (2,461) | | | (300,467) | | | — | | | (3,608) | | | | | | | | | | | | | | | | | | | | | | | | | Short positions | | | 28,762 | | | — | | | 28,762 | | | — | | | (28,932) | | | — | | | (170) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 563,731 | | | - | | | 563,731 | | | (207,185) | | | (336,476) | | | (15,676) | | | 4,394 | |
As of December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amount not offset in the consolidated balance sheet | | | | | | | | | | | Gross amount of | | | Net amount of | | | | | | | | | | | | | | | | | | | | financial assets | | | financial liabilities | | | | | | | | | | | | | | | | | | | | offset in the | | | presented in the | | | | | | | | | | | | | | | | | Gross amount of | | | consolidated balance | | | consolidated | | | Impact of master | | | Financial instrument | | | Cash | | | Net | | | | | financial liabilities | | | sheet | | | balance sheet | | | netting agreements | | | collateral | | | collateral | | | amount | | | | | | | | | | | | | | | | | | | | | | | | | Financial derivatives liabilities | | | 184,840 | | | — | | | 184,840 | | | (152,313) | | | (6,375) | | | (13,222) | | | 12,930 | | | | | | | | | | | | | | | | | | | | | | | | | Repurchase agreements | | | 264,260 | | | — | | | 264,260 | | | (4,799) | | | (265,862) | | | — | | | (6,401) | | | | | | | | | | | | | | | | | | | | | | | | | Short positions | | | 19,554 | | | — | | | 19,554 | | | — | | | (19,702) | | | — | | | (148) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 468,654 | | | — | | | 468,654 | | | (157,112) | | | (291,939) | | | (13,222) | | | 6,381 | |
g) Impairment of financial assets Definition The Bank associates an impairment in the value to financial assets measured at amortized cost, financial assets at FVTOCI, lease receivables and loan commitments and guarantees granted that are not measured at fair value. The impairment represents the best estimation of the financial assets expected credit losses at the consolidated balance sheet date. The impairment for expected credit losses is recognized in the consolidated income statement for the period in which the impairment arises. In the event of occurrence, the recoveries of previously recognized impairment losses are recognized in the consolidated income statement for the period in which the impairment no longer exists or is reduced. In the case of POCI financial assets, the Bank only recognizes the changes in the expected credit losses during the life of the financial asset since the initial recognition as a credit loss. In the case of financial assets at FVTOCI, the changes in the fair value due to expected credit losses are recognized in the consolidated income statement for the period in which the impairment no longer exists or is reduced. In the case of POCI financial assets, the Bank only recognizes the changes in the expected credit losses during the life of the financial asset since the initial recognition as a credit loss. In the case of financial assets at FVTOCI, the changes in the fair value due to expected credit losses are recognized in the
consolidated income statement of the year where the change happened, reflecting the rest of the valuation in other comprehensive income. The expected credit loss is estimated as the difference between the contractual cash flows to be recovered and the expected cash flows discounted using the original effective interest rate. In the case of POCI financial assets, this difference is discounted using the effective interest rate adjusted by credit rating. Allowance for impairment losses Since 2018, the Bank adopted IFRS 9 as issued by the IASB in July 2014, which resulted in changes in accounting policies for measurement of impairment of financial assets.
The Bank assesses on a forward-looking basis the expected credit losses associated with its financial assets carried at amortized cost and at FVTOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk. The impairment estimation methodology segregates financial assets in three categories, based on the stage of each financial asset with regard to its level of credit risk: | ● | Stage 1 (Normal risk): financial assets for which no significant increase in credit risk is identified since their initial recognition. In this case, the allowance for impairment losses reflects credit losses arising from expected defaults over the following twelve months from the reporting date. |
| ● | Stage 2 (Normal risk under watchlist): if there has been a significant increase in credit risk.The impairment estimation methodology segregates financial assets in three categories, based on the stage of each financial asset with regard to its level of credit risk:
| ● | Stage 1 (Normal risk): financial assets for which no significant increase in credit risk is identified since their initial recognition. In this case, the allowance for impairment losses reflects credit losses arising from expected defaults over the following twelve months from the reporting date. |
| ● | Stage 2 (Normal risk under watchlist): if there has been a significant increase in credit risk since the date of initial recognition but the impairment event has not materialized, the financial asset is classified as Stage 2. In this case, the allowance for impairment losses reflects the expected losses from expected defaults over the life of the financial asset. |
| ● | Stage 3 (Doubtful risk): a financial asset is classified in this stage when it shows effective signs of impairment as a result of one or more credit events that have already occurred resulting in a credit loss. In this case, the amount of the allowance for impairment losses reflects the expected losses for credit risk over the expected life of the financial asset. |
For POCI financial assets, the allowance for impairment losses reflects a deep discount that considers the incurred expected credit risk losses from expected defaults over the life of the financial asset.
Once
|
| ● | Stage 3 (Doubtful risk): a financial asset is classified in this stage when it shows effective signs of impairment as a result of one or more credit events that have already occurred resulting in a credit loss. In this case, the Bank has classified its financial assets according to the stage mentioned above, those financial assets are assessed for impairment individually or collectively in order to recognizeamount of the allowance for impairment losses arising fromreflects the expected losses for credit risk as follows:Individual assessment
Financial assets individually assessed for credit impairment are evaluatedover the expected life of the financial asset.
|
For POCI financial assets, the allowance for impairment losses reflects a deep discount that considers the incurred expected credit risk losses of the financial asset. Once the Bank has classified its financial assets according to the stage mentioned above, those financial assets are assessed for impairment individually or collectively in order to recognize the allowance for impairment losses arising from credit risk, as follows: Individual assessment Financial assets individually assessed for credit impairment are estimated by the following methodologies: | a) | Calculating the present value of expected cash flows discounted at an appropriate discount rate of those individually significant financial assets considering the debtor’s financial situation and any guarantees and collateral in place. The Bank takes into account all available information (external or internal), including expert judgment and reasonable and supportable forecasts of future events, to estimate the present value of expected cash flows, and |
| b) | Calculating the expected recovery from available collateral and guarantees, minus the estimated dispositions costs. Subsequently, expected cash flows, discounted at an appropriate rate, are estimated using the expected values from the sale or foreclosure of collateral and guarantees. |
The Bank takes into account all available information (external or internal), including expert judgment and reasonable and supportable forecasts of future events, to estimate the present value of expected cash flows. The Bank has defined asflows, and
|
| b) | Calculating the expected recovery from available collateral and guarantees, minus the estimated dispositions costs. Subsequently, expected cash flows, discounted at an “individually significant financial asset” those financial assets with a total current risk exposure amounting more than 8 million pesos for wholesaleappropriate rate, are estimated using the expected values from the sale or foreclosure of collateral and small and medium-sized enterprises (SME) loan portfolio. This threshold is reviewed annually to adapt it to the Bank’s business circumstances.Collective assessment
Financial assets collectively assessed for credit impairment are evaluated by taking into consideration the historical impairment loss experience at the time of assessment adjusted to reflect current economic conditions and taking into account the characteristics of the counterparty, reasonable and supportable forecasts of futures events, the guarantees and collateral associated with the transaction.
In the estimation of the parameters used for the allowance for impairment losses and for provisions for off-balance sheet risk calculation such as Exposure at Default (EAD), Probability of Default (PD), Loss Given Default (LGD) and discount rate, the Bank leveraged on its experience developing internal models for calculating parameters for regulatory and management purposes. The Bank is aware of the differences between such internal models and IFRS 9 requirements for impairment purposes. As a result, it has focused on adapting to such requirements to the development of its IFRS 9 expected credit loss model.
The Bank performs retrospective and monitoring tests to evaluate the reasonableness of the collective estimate.
Grouping of financial assets for collective assessment
Financial assets assessed collectively are grouped together considering those that have similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the financial assets are, inter alia, instrument type, debtor’s industry, type of guarantee or collateral, age of past due amounts and any other relevant factor for the estimation of future cash flows.
In performing this grouping, there must be sufficient information for the group to be statistically credible. Where sufficient information is not available internally, the Bank has considered internal/external supplementary data to use for assessing purposes. The characteristics and any supplementary data used to determine groupings are outlined below:
a) Middle-market corporate loans
| ● | Credit rating band.guarantees. |
| ● | Guarantee or collateral. |
The Bank has defined as an “individually significant financial asset” those financial assets with a total current risk exposure amounting more than 8 million pesos for wholesale and small and medium-sized enterprises (SME) loan portfolio. This threshold is reviewed annually to adapt it to the Bank’s business circumstances. Collective assessment Financial assets collectively assessed for credit impairment are estimated by taking into consideration the historical impairment loss experience at the time of assessment adjusted to reflect current economic
b) Mortgage loans
| ● | Loan to value ratio band. |
| ● | Credit conversion from variable to fixed rate. |
c) Credit card loans
| ● | Available credit amount. |
d) Personal loans
e) Small and medium-sized enterprises loans
| ● | Available credit amount.conditions and taking into account the characteristics of the counterparty, reasonable and supportable forecasts of future events, the guarantees and collateral associated with the transaction. In the estimation of the parameters used for the allowance for impairment losses and for provisions for off-balance sheet risk calculation such as Exposure at Default (EAD), Probability of Default (PD), Loss Given Default (LGD) and discount rate, the Bank leveraged on its experience developing internal models for calculating parameters for regulatory and management purposes. The Bank is aware of the differences between such internal models and IFRS 9 requirements for impairment purposes, as a result, it has focused on adapting to such requirements to the development of its IFRS 9 expected credit loss model. The Bank performs retrospective and monitoring tests to evaluate the reasonableness of the collective estimate. Grouping of financial assets for collective assessment Financial assets assessed collectively are grouped together considering those that have similar credit risk characteristics indicative of the debtors’ ability to pay all principal and interest amounts in accordance with the contractual terms. The credit risk characteristics considered for the purpose of grouping the financial assets are, inter alia, instrument type, debtor’s industry, type of guarantee or collateral, age of past due amounts and any other relevant factor for the estimation of future cash flows. In performing this grouping, there must be sufficient information for the group to be statistically credible. Where sufficient information is not available internally, the Bank has considered internal/external supplementary data to use for assessing purposes. The characteristics and any supplementary data used to determine groupings are outlined below: a) Middle-market corporate loans | ● | Guarantee or collateral. |
| ● | Credit limit.b) Mortgage loans | ● | Loan to value ratio band. |
| ● | Credit conversion from variable to fixed rate. |
| ● | Guarantee from development banks.c) Credit card loans
f) Payroll loans
| ● | Credit score. | ● | Available credit amount. |
d) Personal loans | ● | Grantede) Small and medium-sized enterprises loans | ● | Available credit amount. |
| ● | Guarantee from development banks. |
f) Payroll loans | ● | Percentage of granted amount. |
| ● | Percentage of granted amount.The appropriateness of grouping is monitored and reviewed on a periodic basis.
Significant increase in credit risk
The Bank considers a financial asset to have experienced a significant increase in credit risk (SICR), since initial recognition, assigning a classification into Stage 2, when one or more of the following quantitative, qualitative or backstop criteria have been met:
Quantitative criteria
The appropriateness of grouping is monitored and reviewed on a periodic basis. Significant increase in credit risk The Bank considers a financial asset to have experienced a significant increase in credit risk (SICR), since initial recognition, assigning a classification into Stage 2, when one or more of the following quantitative, qualitative or backstop criteria have been met: Quantitative criteria For commercial loans to small and medium-sized enterprises, mortgage loans and installment loans to individuals (revolving consumer credit card loans and non-revolving consumer loans), the Bank has established a comparison between the “Lifetime PD” at the reporting date and the “Remaining Lifetime PD Originated” when the financial asset was initially recognized. The financial assets are classified by the “Remaining Lifetime PD Originated” in bands. If the financial asset exceeds the predefined threshold for its band, it is classified as Stage 2 with the corresponding “Lifetime PD” at the reporting date. Each “Remaining Lifetime PD Originated” band classifies all the financial assets with similar characteristics of Probability of Default within a twelve-month period. In order to determine the applicable thresholds for each band, the Bank has analyzed the distribution of “Observed Default Frequency” within a twelve-month period in order to determine the threshold for each band where the defaults observed are concentrated. “Observed Default Frequency” is defined as the rate in which loans that were not impaired become credit-impaired in a lifetime period. The different bands of thresholds for each type of financial asset are shown below. Commercial loans to large enterprises | | | | | “Lifetime PD” band at |
|
| Increase in “Lifetime PD” at the reporting date and the “Remaining which | | initial recognition (%) | | | is considered significant (basis points) | | | | | | <= 0.001746 | | | 6 | | 0.001746 - 0.003955 | | | 8 | | 0.003955 - 0.006149 | | | 10 | | 0.006149 - 0.023039 | | | 12 | | 0.023039 - 0.041789 | | | 14 | | >0.041789 | | | 16 | | | | | |
Commercial loans to real estate | | | | | “Lifetime PD Originated” when the financial asset was initially recognized. The financial assets are classified by the “Remaining Lifetime PD Originated”PD” band at |
|
| Increase in bands. If the financial asset exceeds the predefined threshold for its band, it is classified as Stage 2 with the corresponding “Lifetime PD” at the reporting date.date which | Each “Remaining Lifetime PD Originated” band classifies all the financial assets with similar characteristics of probability of default within a twelve-month period. In order to determine the applicable thresholds for each band, the Bank has analyzed the distribution of “Observed Default Frequency” within a twelve-month period in order to determine the threshold for each band where the defaults observed are concentrated.
| “Observed Default Frequency” initial recognition (%)
| | | is defined as the rate in which loans that were not impaired become credit-impaired in a lifetime period.considered significant (basis points) | | | | | | <=0.015438 | | | 4 | | 0.015438 - 0.045128 | | | 9 | | 0.045128 - 0.107460 | | | 11 | | 0.107460 - 0.136594 | | | 17 | | >0.136594 | | | 20 | | | | | |
Commercial loans to small and medium-sized enterprises
| | The different bands of thresholds for each type of financial asset are shown below.
| Commercial loans to large enterprises
| | | | | | “Lifetime PD” band at | | | Increase in “Lifetime PD” at reporting date which |
| initial recognition (%)
|
|
| is considered significant (basis points)
|
|
|
|
|
| <= 0.01178
|
|
| 6
|
| 0.01178 - 0.01349
|
|
| 16
|
| 0.01349 - 0.05377
|
|
| 25
|
| > 0.05377
|
|
| 35
|
|
|
|
|
|
Commercial loans to real state
| | | | | “Lifetime PD” band at
|
|
| Increase in “Lifetime PD” at reporting date which
|
| initial recognition (%)
|
|
| is considered significant (basis points)
|
|
|
|
|
| <= 0.00683
|
|
| 4
|
| 0.00683 - 0.00944
|
|
| 16
|
| > 0.00944
|
|
| 27
|
|
|
|
|
|
Commercial loans to small and medium-sized enterprises (SMEs)
| | | | | “Lifetime PD” band at
|
|
| Increase in “Lifetime PD” at reporting date which
|
| initial recognition (%)
|
|
| is considered significant (basis points)
|
|
|
|
|
| <= 0.01660
|
|
| 8
|
| 0.01660 - 0.02135
|
|
| 13
|
| 0.02135 - 0.03718
|
|
| 15
|
| 0.03718 - 0.06932
|
|
| 16
|
| 0.06932 - 0.11089
|
|
| 21
|
| 0.11089 - 0.14153
|
|
| 24
|
| 0.14153 - 0.16235
|
|
| 28
|
| 0.16235 - 0.25103
|
|
| 29
|
| > 0.25103
|
|
| 31
|
|
|
|
|
|
Mortgage loans
| | | | | “Lifetime PD” band at
|
|
| Increase in “Lifetime PD” at reporting date which
|
| initial recognition (%)
|
|
| is considered significant (basis points)
|
|
|
|
|
| <= 0.04077
|
|
| 11
|
| 0.04077 - 0.05573
|
|
| 14
|
| 0.05573 - 0.06676
|
|
| 18
|
| 0.06676 - 0.12477
|
|
| 20
|
| 0.12477 - 0.15225
|
|
| 22
|
| > 0.15225
|
|
| 24
|
|
|
|
|
|
Revolving consumer credit card loans
| | | | | “Lifetime PD” band at
|
|
| Increase in “Lifetime PD” at reporting date which
|
| initial recognition (%)
|
|
| is considered significant (basis points)
|
|
|
|
|
| <= 0.00953
|
|
| 10
|
| 0.00953 - 0.01147
|
|
| 11
|
| 0.01147 - 0.02353
|
|
| 16
|
| 0.02353 - 0.02900
|
|
| 23
|
| 0.02900 - 0.04120
|
|
| 26
|
| 0.04120 - 0.05442
|
|
| 30
|
| 0.05442 – 0.06950
|
|
| 34
|
| > 0.06950
|
|
| 38
|
|
|
|
|
|
Non-revolving consumer loans (payroll loans)
| | | | | “Lifetime PD” band at
|
|
| Increase in “Lifetime PD” at reporting date which
|
| initial recognition (%)
|
|
| is considered significant (basis points)
|
|
|
|
|
| <= 0.10109
|
|
| 15
|
| 0.10109 - 0.13383
|
|
| 22
|
| 0.13383 - 0.15909
|
|
| 24
|
| 0.15909 - 0.19360
|
|
| 25
|
| 0.19360 - 0.21380
|
|
| 27
|
| 0.21380 - 0.24165
|
|
| 29
|
| 0.24165 - 0.26122
|
|
| 31
|
| > 0.26122
|
|
| 32
|
|
|
|
|
|
Non-revolving consumer loans (personal loans)
| | | | | “Lifetime PD” band at
|
|
| Increase in “Lifetime PD” at reporting date which
|
| initial recognition (%)
|
|
| is considered significant (basis points)
|
|
|
|
|
| <= 0.14306
|
|
| 16
|
| 0.14306 - 0.19274
|
|
| 20
|
| 0.19274 - 0.24346
|
|
| 24
|
| 0.24346 - 0.25868
|
|
| 28
|
| 0.25868 - 0.28734
|
|
| 31
|
| 0.28734 - 0.33463
|
|
| 33
|
| > 0.33463
|
|
| 36
|
|
|
|
|
|
The “Lifetime PD” movements on financial assets which do not subsequently become more than thirty days past due have also been assessed to identify the “natural” movement in “Lifetime PD” at reporting date which
| | initial recognition (%) | | | is considered significant (basis points) | | | | | | <=0.022138 | | | 7 | | 0.022138 - 0.037734 | | | 9 | | 0.037734 - 0.062950 | | | 11 | | 0.062950 - 0.099364 | | | 13 | | 0.099364 - 0.131539 | | | 23 | | 0.131539 - 0.175113 | | | 27 | | 0.175113 - 0.198299 | | | 28 | | 0.198299 - 0.281104 | | | 29 | | >0.281104 | | | 30 | | | | | |
Mortgage loans | | | | | “Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | | initial recognition (%) | | | is considered significant (basis points) | | | | | | <=0.058243 | | | 14 | | 0.058243 - 0.082909 | | | 15 | | 0.082909 - 0.146843 | | | 17 | | 0.146843 - 0.164525 | | | 18 | | 0.164525 - 0.189841 | | | 20 | | 0.189841 - 0.260988 | | | 21 | | 0.260988 - 0.350462 | | | 25 | | >0.350462 | | | 28 | | | | | |
Revolving consumer credit card loans | | | | | “Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | | initial recognition (%) | | | is considered significant (basis points) | | | | | | <=0.013470 | | | 9 | | 0.013470 - 0.022584 | | | 12 | | 0.022584 - 0.030918 | | | 14 | | 0.030918 - 0.042373 | | | 16 | | 0.042373 - 0.051001 | | | 22 | | 0.051001 - 0.063232 | | | 28 | | 0.063232 - 0.083787 | | | 34 | | 0.083787 - 0.106176 | | | 40 | | >0.106176 | | | 46 | | | | | |
Non-revolving consumer loans (payroll loans) | | | | | “Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | | initial recognition (%) | | | is considered significant (basis points) | | | | | | <=0.065107 | | | 12 | | 0.065107 - 0.084679 | | | 15 | | 0.084679 - 0.114538 | | | 17 | | 0.114538 - 0.120289 | | | 18 | | 0.120289 - 0.144679 | | | 19 | | 0.144679 - 0.172172 | | | 22 | | 0.172172 - 0.268165 | | | 26 | | >0.268165 | | | 30 | | | | | |
Non-revolving consumer loans (personal loans) | | | | | “Lifetime PD” band at |
|
| Increase in “Lifetime PD” at reporting date which | | initial recognition (%) | | | is considered significant (basis points) | | | | | | <=0.135945 | | | 14 | | 0.135945 - 0.172186 | | | 15 | | 0.172186 - 0.194727 | | | 17 | | 0.194727 - 0.245958 | | | 19 | | 0.245958 - 0.26134 | | | 23 | | 0.26134 - 0.290297 | | | 25 | | 0.290297 - 0.334647 | | | 27 | | >0.334647 | | | 29 | | | | | |
The “Lifetime PD” movements on financial assets which do not subsequently become more than thirty days past due have also been assessed to identify the “natural” movement in “Lifetime PD” which is not considered indicative of a significant increase in credit risk. For Santander Corporate and Investment Banking customers, debt instruments at amortized cost and debt instruments at FVTOCI, the assessment is performed by comparing the current credit rating with the initial credit rating for each financial asset. Qualitative criteria For commercial loans to small and medium-sized enterprises, mortgage loans and installment loans to individuals (revolving consumer credit card loans and non-revolving consumer loans), if the borrower meets one or more of the following criteria: | ● | In short-term forbearance. |
| ● | Extension to the terms granted. |
For Santander Corporate and Investment Banking customers, debt instruments at amortized cost and debt instruments at FVTOCI, if the borrower requires closer monitoring and a review of its credit rating and/or the financial asset meets one or more of the following criteria: | ● | Significant debt instrument price variation. |
| ● | Significant adverse changes in business, financial and/or economic conditions in which the borrower operates. |
| ● | Actual or expected forbearance or restructuring. |
| ● | Actual or expected significant adverse change in operating results of the borrower. |
| ● | Significant change in collateral value, which is not considered indicativeexpected to increase risk of a significant increase in credit risk.For Santander Corporate and Investment Banking customers, debt instruments at amortized cost and debt instruments at FVTOCI, the assessment is performed by comparing the current credit rating with the initial credit rating for each financial asset.
|
| ● | Early signs of ContentsQualitative criteria
For commercial loans to small and medium-sized enterprises, mortgage loans and installment loans to individuals (revolving consumer credit card loans and non-revolving consumer loans), if the borrower meets one or more of the following criteria:
| ● | In short-term forbearance.cash flow/ liquidity problems. |
| ● | Extension to the terms granted. |
For Santander Corporate and Investment Banking customers, debt instruments at amortized cost and debt instruments at FVTOCI, if the borrower requires closer monitoring and a review
The assessment of significant increase in credit risk incorporates forward-looking information and is performed on a monthly basis at a portfolio level for all retail financial assets held by the Bank. For non-retail financial assets, where a “watchlist” is used to monitor credit risk, this assessment is performed at counterparty level on a periodic basis. The criteria used to identify the significant increase in credit risk are monitored and reviewed periodically for appropriateness by the Bank. The Bank does not consider the low credit risk as an indicator that a financial asset has not increased significantly in risk since initial recognition. Backstop criteria A backstop is applied and the financial asset is considered to have experienced a significant increase in credit risk if the borrower is more than thirty days past due on its contractual payments. Definition of default and credit-impaired financial assets The Bank defines a financial asset as in default, when either or both of the following conditions have taken place: | ● | The obligor/credit rating and/or the financial asset meets one or more of the following criteria: | ● | Significant debt instrument price variation. |
| ● | Significant adverse changes in business, financial and/or economic conditions in which the borrower operates. |
| ● | Actual or expected forbearance or restructuring. |
| ● | Actual or expected significant adverse change in operating results of the borrower. |
| ● | Significant change in collateral value, which is expected to increase risk of default. |
| ● | Early signs of cash flow/ liquidity problems. |
The assessment of significant increase in credit risk incorporates forward-looking information and is performed on a monthly basis at a portfolio level for all retail financial assets held by the Bank. For non-retail financial assets, where a “watchlist” is used to monitor credit risk, this assessment is performed at counterparty level on a periodic basis. The criteria used to identify the significant increase in credit risk are monitored and reviewed periodically for appropriateness by the Bank.
The Bank does not consider the low credit risk as an indicator that a financial asset has not increased significantly in risk since initial recognition.
Backstop criteria
A backstop is applied and the financial asset is considered to have experienced a significant increase in credit risk if the borrower is more than thirty days past due on its contractual payments.
Definition of default and credit-impaired financial assets
The Bank defines a financial asset as in default, when the financial asset is considered as credit-impaired or non-performing. Credit-impaired loans or non-performing loans include customers, which are in financial difficulties and have been renegotiated.
Credit-impaired financial assets are classified as Stage 3 category according to IFRS 9.
The Bank applies the following criteria to classify financial assets as credit-impaired loans:
| ● | Commercial, financial and industrial loans. |
Loans with a single payment of principal and interest (non-amortizing loans), generally commercial loans for a short period, are considered impaired after ninety days of the maturity date.
Loans with a single payment of principal at maturity and with periodic interest payments (interest-only loans) are considered impaired after ninety days interest or principal become due.
Loans whose principal and interest payments have been agreed in periodic installments (amortizing loans) are considered impaired after ninety days an installment becomes due.
Mortgage loans are considered credit-impaired when a paymentfacility is past due more than ninety days.
| ● | Installment loans to individuals. |
Revolving consumer90 consecutive days on any material credit cards loans are considered credit-impaired when payment is not received after ninety days it becomes due.
Non-revolving consumer loans whose principal and interest payments have been agreed in periodic installments are considered impaired after ninety days an installment becomes due.
| ● | If the borrower is declared bankrupt in accordance with the Mexican Commercial Bankruptcy Law. |
The Bank considers also as credit-impaired or non-performing financial assets (loans), the sum of all transactions of a customer when the loan balances of the same customer categorized, as credit-impaired (Stage 3) are equivalent to more than 20% of the total outstanding amounts of that customer or when the recently twelve-month written-off balance of a customer represents more than 5% of such customer’s outstanding balance.
These instruments may be reclassified to other categories if, because of the collection of part of the past due balances, the reasons for their classification in Stage 3 do not remain and the customer does not have balances more than ninety days past due in other loans.
Financial assets (loans) which are not credit-impaired due to default but for which there are reasonable doubts about their full repayment (principal and interest) according to its contractual terms are considered credit-impaired. This analysis includes, among others: customers in situations involving deterioration in their creditworthiness, such as negative net equity, continued losses, significant decrease in revenue or in the customer’s recurring cash flows, general delay in payments, inadequate economic or financial structure, insufficient cash flows to settle debt or inability to obtain additional financing, the existence of an internal or external rating showing that the customer is in default and the existence of overdue customer commitments with a significantobligation (including any amount to public institutions or employees.
These financial instruments may be reclassified to other categories if, as a result of an individualized study, reasonable doubts do not remain about the total repayment under the contractually agreed terms and the customer does not have balances with more than ninety days past due.
Credit-impaired loans, which are renegotiated, will remain classified as Stage 3 category until there exists evidence of sustained payment. Sustained payment is considered as the payment by the borrower without payment delay for the total amount due and payable in terms of principal, and interest during certain period.
A financial asset (loans) is considered to be no longer in default (i.e., to have been cured) when all the contractual payments have been settled, except for those cases in which the borrower is in long-term forbearance and the financial asset does not fulfill the criteria to be considered as credit-impaired. For these particular cases, a twelve-month probation period is necessary in order to be considered as not in default.
In the case of forbearances, instruments classified as Stage 2 (normal risk under watchlist) may be generally reclassified to Stage 1 (normal risk) in the following circumstances: i) at least two years have elapsed from the date of reclassification to that category or from its forbearance date, ii) the customer has paid the accrued principal and interest balance, and iii) the customer has no other instruments with more than thirty days past due balances.
In the case of forbearances, instruments classified as Stage 3 (doubtful risk) may be reclassified to Stage 2 (normal risk under watchlist) when the following circumstances are present: i) a minimum period of one year has elapsed from the forbearance date, ii) the customer has paid the accrued principal and interest amounts, and iii) the customer has no other loan balance with more than ninety days past due.
Debt instruments are considered credit-impaired when a payment is past due more than ninety days.
Measuring expected credit losses
Measurement of expected credit losses (ECL) requires the use of complex models and significant assumptions about future economic conditions and credit behavior (i.e., the likelihood of customers defaulting and the resulting credit losses) and requires significant judgments that must be supported by past, present and future information, such as:
| ● | Determining criteria for significant increase in credit risk. |
| ● | Choosing appropriate models and assumptions for the measurement of expected credit losses.fee). |
| ● | There are indications that the obligor/credit facility is unlikely to pay its credit obligations in full, without recourse to actions such as realizing security. |
The Bank applies the following criteria to classify financial assets as credit-impaired loans: In the case of retail exposures, the definition of default may be applied at the level of an obligor for some types of retail exposures and at the level of a credit facility for others (if it is well justified by internal risk management practices such as different business model). Non-retail exposure classes must be considered at the obligor level and where the obligor is considered defaulted, all exposures to that obligor should be considered defaulted. Materiality of credit obligations past due shall be assessed against a materiality threshold that is composed of both an absolute and a relative components (see below specific cases for retail and non-retail exposures). Where both of those components are breached for more than 90 consecutive days a default would be considered to have occurred. The scope of exposures that must be taken into account in the numerator/ denominator when calculating the materiality threshold is different depending on the level of the definition of default: | ● | Where the definition of default is applied at the level of an obligor the components of the materiality threshold should also be applied at the level of an obligor. |
| ● | Where the definition of default is applied at the level of credit facility (retail exposures) the components of the materiality threshold should also be applied at the level of credit facility. |
| ● | In the case of retail exposures, a joint obligor should be treated as a different obligor from each of the individual obligors and therefore, the components of the materiality threshold should be assessed by applying the materiality threshold to all joint credit obligations granted to this specific set of obligors. |
Measuring expected credit losses Measurement of expected credit losses (ECL) requires the use of complex models and significant assumptions about future economic conditions and credit behavior (i.e., the likelihood of customers defaulting and the resulting credit losses) and requires significant judgments that must be supported by past, present and future information, such as: | ● | Determining criteria for significant increase in credit risk. |
| ● | Choosing appropriate models and assumptions for the measurement of expected credit losses. |
| ● | Making assumptions and estimates to incorporate relevant information about past events, current conditions and forecasts of macroeconomic conditions. |
| ● | Determining the lifetime and point of initial recognition of revolving consumer credit card loans. |
| ● | Establishing the number and relative weightings of forward-looking scenarios. |
| ● | Establishing groups of similar financial assets for measuring expected credit losses. |
The methodology for the quantification of expected credit losses is based on an unbiased and weighted consideration of the occurrence of up to three possible future scenarios that could impact the collection of contractual cash flows, taking into account the time-value of money, all available information relevant to past events and current conditions and projections of certain portfolio factors and macroeconomic factors, such as GDP, Consumer Price Index (CPI), or unemployment rates, deemed relevant to the measurement of expected credit losses.
Expected credit losses are recognized for financial assets measured at amortized cost, financial assets measured at FVTOCI, financial guarantees and loan commitments. Expected credit losses are also recognized on the undrawn portion of revolving credit lines, which include credit card limits.
The expected credit losses are measured on either a twelve-month or “Lifetime” basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether a financial asset is considered to be credit-impaired.
Expected credit losses are the discounted product of the PD, EAD and LGD, defined as follows:
| ● | The PD is the estimated probability that the counterparty will default on its principal and/or interest payment obligations. The PD has been defined as the probability that an operation accumulates more than ninety days past due or is deemed to be in default as per the criteria mentioned above, either over the next twelve months or over the remaining lifetime (Lifetime PD) of the obligation. |
| ● | EAD is the amount of estimated risk exposure incurred at the time of the counterparty’s analysis. |
| ● | LGD is the estimated loss arising in an event of default. It depends mainly on the guarantees and collateral associated with the transaction. LGD is expressed as a percentage loss per unit of exposure at the time of default (EAD). LGD is calculated on a twelve-month or “Lifetime” basis, where twelve-month LGD is the percentage of loss expected to be incurred if the default occurs in the next twelve months and “Lifetime” LGD is the percentage of loss expected to be incurred if the default occurs over the remaining expected lifetime of the loan. |
The expected credit losses are determined by projecting the PD, LGD and EAD for each future year and for each loan. These three components are multiplied together and adjusted for the likelihood of survival (i.e., the exposure has not prepaid or defaulted in an earlier month). This effectively calculates the expected credit losses for each future year, which is then discounted back to the reporting date and added. The discount rate used in the expected credit losses calculation is the original effective interest rate of the exposure or an approximation thereof.
The “Lifetime PD” is developed by applying a maturity profile to the current twelve-month PD. The maturity profile looks at how defaults develop on a financial assets portfolio from the point of initial recognition throughout the lifetime of the financial assets. The maturity profile is based on historical observed data and is assumed to be the same across all financial assets within a portfolio. This is supported by historical analysis.
The twelve-month EAD and “Lifetime” EAD are determined based on the expected payment profile, which varies by financial asset type.
| ● | For amortizing products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over a twelve-month or “Lifetime” basis. “Lifetime” EAD will also be adjusted for any expected overpayments made by a borrower. Early repayment/refinance assumptions are also incorporated into the “Lifetime” EAD calculation. |
| ● | For revolving consumer loans, the EAD is predicted by taking current drawn balance and adding a “Credit Conversion Factor” (CCF) which allows for the expected drawdown of the remaining limit by the time of default. These assumptions vary by loan type and current limit utilization band, based on analysis of the Bank´s recent historical default data. |
The twelve-month LGD and “Lifetime” LGD are determined based on the factors which impact the recoveries made post default. These vary by financial asset type.
| ● | For secured financial assets, this is primarily based on collateral type and projected collateral values, historical discounts to market/book values due to forced sales, time to repossession and recovery costs observed. |
| ● | For unsecured financial assets, LGD is typically set by financial asset due to the limited differentiation in recoveries archived across different borrowers. The LGD is influenced by collection strategies, including contracted debt sales and price. |
Forward-looking economic information is also included in determining the twelve-month PD, “Lifetime PD” and LGD. These assumptions vary by financial asset type.
The assumptions underlying the expected credit losses calculation – such as how the maturity profile of the PD and how collateral values change – are monitored and reviewed on a monthly basis.
The Bank performs a periodic assessment to evaluate if the assumptions and methodology need to be updated.
The assessments performed during the year ended December 31, 2020 have not identified significant changes in facts and circumstances that would require updates on estimation techniques, significant assumptions or methodologies currently employed in the expected credit losses calculation.
Expected credit loss measurement considerations related to COVID-19 pandemic
Expected credit losses measurement according to IFRS 9 is challenging given its determination incorporates the estimation of credit events, and their consequential cash shortfalls, based on a probability-weighted approach. In times of heightened uncertainty, stressed economic conditions and government assistance, these estimations become more difficult. The assessment of the impact of the COVID-19 pandemic on expected credit losses requires significant judgment, especially as it is not directly comparable with any recent similar events and the impact depends on government measures as much as the spread of the virus.
Expected credit losses are a discounted probability-weighted measurement of expected cash shortfalls either based on credit events arising in the twelve months from the reporting date or based on credit events arising over the lifetime of the financial asset. Lifetime expected credit losses are recognized when there is a significant increase in credit risk on a financial asset.
IFRS 9 requires the application of judgment and requires and allows entities to adjust their approach to determining expected credit losses in different circumstances. The IASB noted that a number of assumptions and linkages underlying the way expected credit losses have been determined no longer hold in 2020 due to the COVID-19 pandemic environment. For example, the relationship between GDP and other macroeconomic variables, such as unemployment and interest rates, and sector-specific variables, such as oil prices, is very likely to be different from what has been experienced in the past and is currently used in economic forecasting models.
The IASB has indicated that entities should not continue to apply their existing ECL methodology mechanically. For example, the granting of payment holidays such as the ones contained in the Support Program should not automatically result in all those loans being considered to have suffered a significant increase in credit risk.
Additionally, regulators have stressed the need to differentiate a temporary liquidity need from a significant increase in credit risk and highlighted that there may be very limited information available to make this determination at an individual customer level. This means that banks should distinguish between obligors whose long-term credit risk is unlikely to be significantly affected by the COVID- 19 pandemic from those who may be more permanently impacted.
Measurement of expected credit losses and assessment of a significant increase in credit risk are based on reasonable and supportable information that is available without undue cost or effort. Hence, the Bank developed its estimates based on the best available information about past events, current conditions and forecasts of economic conditionsmacroeconomic conditions.
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| ● | Determining the lifetime and applied certain key IFRS 9 accounting considerations related to the measurementpoint of expected credit losses with the purpose of capture the effects of COVID-19 pandemic.
The current environment is subject to rapid change, so the Bank continuously monitors updated facts and circumstances as new information becomes available.
The Support Program and the COVID-19 pandemic originated several challenges for the Bank’s Management in the measurement of expected credit losses, mainly:
a) | | The impact of payment moratoria on the calculation of allowance for loan losses, which has as one of its key inputs, the customers’ arrears as they are a statistically proven indicator of their probability of default. Given the probability of non-payment or default is higher when a customer is late in its payments, the application of the Support Program makes null the relevance of such key input; |
b) | | Update the PD in the IFRS 9 expected credit loss model towards a Point-in-Time PD for several relevant loan portfolio; and |
c) | | Criteria regarding the classification (staging) of the customers, especially relating to a possible significant increase of credit risk. |
With the aim of avoid translating undesired volatility to the measurement of expected credit losses, the Bank maintained in the IFRS 9 expected credit loss model the macroeconomic conditions prior to the COVID-19 pandemic.
Due to the effects of COVID-19 pandemic could not be reflected in the IFRS 9 expected credit loss model, post-model adjustments or overlays were considered.
According to the Bank's internal governance, the considerations regarding the measurement of expected credit losses related to COVID-19 pandemic were submitted to the analysis and approval of the executive risk committee, a body empowered by the Board of Directors to carry out Bank’s risk management, including the measurement andinitial recognition of expectedrevolving consumer credit losses.
Support Program
In measuringcard loans.
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| ● | Establishing the expected credit lossesnumber and relative weightings of loans in the Support Program, the Bank classified, as a first step, the customers in different risk levels according to their COVID-19 pre-pandemic score (March 2020). Additionally, some measurement drivers were incorporated such as their outstanding amount, levelsforward-looking scenarios. |
| ● | Establishing groups of deposits, variation in payroll dispersals and economic sector in order to determine adjusted risk levels.For risk management purposes due to COVID-19 environment, the Bank divided the customers into clusters taking into account their risk level and its credit exposure to the Bank. This classification considered mitigating mechanisms such as guarantees, loan-to-value ratio and unemployment insurance, among others. This phase consisted of identifying the loans by clusters with the objective of structuring a ‘loan portfolio management map’ where the kinds of actions to be followed in each cluster were clearly identified, according to the customer’s risk level. This helped the Bank to define specific actionssimilar financial assets for each customer in order to carry out an ‘advanced risk management strategy’ to be executed in each cluster (contact with customers, restructuring plans or specific recovery actions).
Forward-looking information
IFRS 9 is purposefully designed to be forward-looking, reflecting expectations of future credit events (and resulting cash shortfalls) assessed at the reporting date. Although current circumstances are difficult and create high levels of uncertainty, the expected credit losses estimated by the Bank as of December 31, 2020 are based on all reasonable and supportable information including that, which is forward-looking.
The Bank updated the following forward-looking information in the measurement of the expected credit losses due to COVID-19 pandemic situation:
| ● | Macroeconomic forecasts including GDP, industry-sector growth rates, unemployment (national and regional), inflation, interest rates and property price indexation. |
| ● | Customers’ probability of non-payment in response to macroeconomic factors that specifically relate to the customer, noting that customers may prioritize payments of some debt obligations over others and therefore the credit risk of amounts owed to different creditors by the same customer can vary. |
| ● | Customers’ behavior in respect of timing of prepayment or extension options, or use of undrawn facilities that affect Bank’s exposure. |
| ● | Valuation of collateral and timing of foreclosure. |
This forward-looking information affects directly the PD, EAD and LGD that are key inputs in IFRS 9 expected credit loss model.
Default
In applying IFRS 9, the Bank defined a number of key terms and made a number of important application decisions when measuring expected credit losses. One such item
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The methodology for the quantification of expected credit losses is based on an unbiased and weighted consideration of the occurrence of up to three possible future scenarios that could impact the collection of contractual cash flows, taking into account the time-value of money, all available information relevant to past events and current conditions and projections of certain portfolio factors and macroeconomic factors, such as GDP, Consumer Price Index (CPI), or unemployment rates, deemed relevant to the measurement of expected credit losses. Expected credit losses are recognized for financial assets measured at amortized cost, financial assets measured at FVTOCI, financial guarantees and loan commitments. Expected credit losses are also recognized on the undrawn portion of revolving credit lines, which include credit card limits. The expected credit losses are measured on either a twelve-month or “Lifetime” basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether a financial asset is considered to be credit-impaired. Expected credit losses are the discounted product of the PD, EAD and LGD, defined as follows: | ● | The PD is the definitionestimated probability that the counterparty will default on its principal and/or interest payment obligations. The PD has been defined as the probability that an operation accumulates more than ninety days past due or is deemed to be in default as per the criteria mentioned above, either over the next twelve months or over the remaining lifetime (Lifetime PD) of the obligation. |
| ● | EAD is the amount of estimated risk exposure incurred at the time of the counterparty’s analysis. |
| ● | LGD is the estimated loss arising in an event of default. The definitionIt depends mainly on the guarantees and collateral associated with the transaction. LGD is expressed as a percentage loss per unit of exposure at the time of default directly influences(EAD). LGD is calculated on a twelve-month or “Lifetime” basis, where twelve-month LGD is the stagingpercentage of exposures given that stagingloss expected to be incurred if the default occurs in the next twelve months and “Lifetime” LGD is the percentage of loss expected to be incurred if the default occurs over the remaining expected lifetime of the loan. |
The expected credit losses are determined by projecting the PD, LGD and EAD for each future year and for each loan. These three components are multiplied together and adjusted for the likelihood of survival (i.e., the exposure has not prepaid or defaulted in an earlier month). This effectively calculates the expected credit losses for each future year, which is then discounted back to the reporting date and added. The discount rate used in the expected credit losses calculation is the original effective interest rate of the exposure or an approximation thereof. The “Lifetime PD” is developed by applying a maturity profile to the current twelve-month PD. The maturity profile looks at how defaults develop on a financial assets portfolio from the point of initial recognition throughout the lifetime of the financial assets. The maturity profile is based on historical observed data and is assumed to be the same across all financial assets within a portfolio. This is supported by historical analysis. The twelve-month EAD and “Lifetime” EAD are determined based on the expected payment profile, which varies by loan type. | ● | For amortizing products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over a twelve-month or “Lifetime” basis. “Lifetime” EAD will also be adjusted for any expected overpayments made by a borrower. Early repayment/refinance assumptions are also incorporated into the “Lifetime” EAD calculation. |
| ● | For revolving consumer loans, the EAD is predicted by taking current drawn balance and adding a “Credit Conversion Factor” (CCF) which allows for the expected drawdown of the remaining limit by the time of default. These assumptions vary by loan type and current limit utilization band, based on analysis of the Bank´s recent historical default data. |
The twelve-month LGD and “Lifetime” LGD are determined based on the factors which impact the recoveries made post-default. These vary by loan type. | ● | For secured loans, this is primarily based on collateral type and projected collateral values, historical discounts to market/book values due to forced sales, time to repossession and recovery costs observed. |
| ● | For unsecured loans, LGD is typically set by loan due to the limited differentiation in recoveries archived across different borrowers. The LGD is influenced by collection strategies, including contracted debt sales and price. |
Forward-looking economic information is also included in determining the twelve-month PD, “Lifetime PD” and LGD. These assumptions vary by loan type. The assumptions underlying the expected credit losses calculation – such as how the maturity profile of the PD and how collateral values change – are monitored and reviewed on a monthly basis. The Bank performs a periodic assessment to evaluate if the assumptions and methodology need to be updated. The assessments performed during the year ended December 31, 2022 have not identified significant changes in facts and circumstances that would require updates on estimation techniques, significant assumptions or methodologies currently employed in the expected credit losses calculation. Expected life of the financial assets For the purpose of estimating the expected life of the financial assets, all the contractual terms have been taken into account (i.e., prepayments, duration, purchase options, etc.), being the contractual period (including extension options) the maximum period considered to measure the expected credit losses. In the case of financial assets with an uncertain maturity period and a component of undrawn commitment (i.e., credit cards), the expected life is estimated through quantitative analyses to determine the period during which the entity is exposed to credit risk, also considering the effectiveness of management procedures that mitigate such exposure (e.g. the ability to unilaterally cancel such financial asset, etc.). Expected credit loss measurement considerations related to COVID-19 pandemic During 2021 and 2020, expected credit losses measurement according to IFRS 9 was challenging given its determination incorporated the estimation of credit events, and their consequential cash shortfalls, based on a probability-weighted approach. In times of heightened uncertainty and stressed economic conditions, these estimations become more difficult. The assessment of the impact of the COVID-19 pandemic on expected credit losses required significant judgment, especially as it was not directly comparable with any similar events and the impact depended on government measures as much as the spread of the virus and its variants. Expected credit losses are a discounted probability-weighted measurement of expected cash shortfalls either based on credit events arising in the twelve months from the reporting date or based on credit events arising over the lifetime of the financial asset. Lifetime expected credit losses were recognized when there was a significant increase in credit risk on a financial asset. The IASB had indicated that entities should not continue to apply their existing ECL methodology mechanically. IFRS 9 requires the application of judgment and required and allowed entities to adjust their approach to determining expected credit losses in different circumstances. The IASB noted that a number of assumptions and linkages underlying the way expected credit losses have been determined no longer hold due to the COVID-19 pandemic environment. Measurement of expected credit losses and assessment of a significant increase in credit risk were based on reasonable and supportable information that was available without undue cost or effort. Hence, the Bank developed its estimates based on the best available information about past events, current conditions and forecasts of economic conditions and applied certain key IFRS 9 accounting considerations related to the measurement of expected credit losses with the purpose of capturing the effects of the COVID-19 pandemic. The environment was subject to rapid change, so the Bank continuously monitors updated facts and circumstances as new information becomes available. IFRS 9 is purposefully designed to be forward-looking, reflecting expectations of future credit events (and resulting cash shortfalls) assessed at the reporting date. The expected credit losses estimated by the Bank as of December 31, 2022 are based on all reasonable and supportable information including that, which is forward-looking. During 2020 and 2021, the Bank updated the following forward-looking information in the measurement of the expected credit losses due to the COVID-19 pandemic situation: | ● | Macroeconomic forecasts including GDP, industry-sector growth rates, unemployment (national and regional), inflation, interest rates and property price indexation. |
| ● | Customers’ probability of default happening.IFRS 9 requires that default definition is applied consistently to all financial instruments unless information becomes available that demonstrates that another default definition is more appropriate for a particular financial instrument to ensure that they reflect current economic conditions of what a default is.
The Bank’s definition of default is aligned, to the extent acceptable, to prudential regulatory definitions of default. Some prudential regulators have issued updated guidance on prudential default definitionsnon-payment in response to COVID-19 pandemic.macroeconomic factors that specifically relate to the customer, noting that customers may prioritize payments of some debt obligations over others and therefore the credit risk of amounts owed to different creditors by the same customer can vary.
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| ● | Customers’ behavior in respect of timing of prepayment or extension options, or use of undrawn facilities that affect Bank’s exposure. |
| ● | Valuation of collateral and timing of foreclosure. |
This forward-looking information affects directly the PD, EAD and LGD that are key inputs in IFRS 9 expected credit loss model. In applying IFRS 9, the Bank defined a number of key terms and made a number of important application decisions when measuring expected credit losses. One such item is the definition of default. The definition of default directly influences the staging of exposures given that staging is based on the probability of default happening. IFRS 9 required that default definition was applied consistently to all financial instruments unless information becomes available that demonstrates that another default definition was more appropriate for a particular financial instrument to ensure that they reflect current economic conditions of what a default was. IFRS 9 states that there was a rebuttable presumption that default did not occur later than when a financial asset was ninety days past due unless there was reasonable and supportable information to demonstrate that a more lagging default criterion was more appropriate. In staging analysis, the Bank did not apply mechanically the identification of a significant increase in credit risk. Assessment of a significant increase in credit risk was based on reasonable and supportable information that is available without undue cost or effort. The Bank applied a medium-long term approach when assessing the customer’s credit quality and considers if the customer was experiencing temporary financial difficulties in order to determine the correspondent classification (staging). Repayment capacity of the customer in the medium-term was also evaluated. The Bank monitors the behavior of ratings and in case of atypical movements; implements actions in order to avoid an excessive impact on the expected credit losses. As of December 31, 2022, considering the positive evolution of the pandemic effects on financial assets, additional credit loss measurement considerations related to COVID-19 pandemic were not necessary. Post-model adjustments - overlays During 2020, the Bank decided to recognize a “macroeconomic overlay”, which was calculated with a long-run vision in order to avoid short-term volatility, which was determined from a softening of the macroeconomic scenario that the Bank uses in its annual planning exercise with a three-year horizon. This “macroeconomic overlay” was calculated under a bottom-up approach, aligned with the ‘business as usual’ (BAU) process of forward-looking calculation, where the sensitivity resulting from the expected credit losses, at a credit level, is distributed for each of the loan portfolios. During the course of 2020 and 2021, the macroeconomic overlay was reversed as a result of the return to normality of the Mexican economy. Accordingly, there are no post-model adjustments as of December 31, 2022. Details of post-model adjustments for 2020 – overlays is presented in Note 11.d. Effective guarantees The following constitute effective guarantees: | a) | Mortgage guarantees on housing as long as they are first duly constituted and registered in favor of the Bank. The Bank assessedproperties include: |
i. Buildings and building elements, distinguishing among: | ● | Offices, stores and multi-purpose premises; and |
| ● | Rest of buildings such as non-multi-purpose premises and hotels. |
ii. Urban and developable ordered land. iii. Rest of properties that classify as: buildings and building elements under construction, such as property development in progress and halted development, and the rest of land types, such as rural lands. | b) | Collateral guarantees on financial instruments in the form of cash deposits and debt securities issued by creditworthy issuers. |
| c) | Other types of real guarantees, including properties received in guarantee and second and subsequent mortgages on properties, as long as the entity demonstrates its effectiveness. When assessing the effectiveness of the second and subsequent mortgages on properties the entity will implement particularly restrictive criteria. It will take into account, among others, whether thesethe previous charges are appropriatein favor of the entity itself or not and the relationship between the risk guaranteed by them and the property value. |
| d) | Personal guarantees, as well as the incorporation of new owners, covering the entire amount of the financial instruments and implying direct and joint liability to the entity of persons or other entities whose solvency is sufficiently proven to ensure the repayment of the loan on the agreed terms. |
Forward-looking information incorporated in the expected credit losses models The Bank already uses forward-looking information in internal administration and regulatory processes and has leveraged its experience in the management of such information, maintaining consistency with the information used in the other processes. The assessment of significant increase in credit risk and the calculation of expected credit losses both incorporate forward-looking information. The Bank has performed historical analysis and identified the key macroeconomic and portfolio factors affecting credit risk and expected credit losses for each financial assets portfolio. The following represent the most significant factors that could substantially change the estimated expected credit losses: | ● | Peso/USD exchange rate, given its substantial influence on operations and profitability. |
| ● | Stock markets, given its considered critical to economic development as it gives companies the ability to quickly access capital from the public. |
| ● | Investment funds, as an indicator of the country´s socio-economic development and therefore in the investors’ confidence. |
| ● | CPI, given its overall relevance for entities’ performance, customers’ purchasing power and economic stability. |
| ● | Loans – Consumer, given its relation to personal income and saving as a source of consumer purchasing power. |
| ● | Unemployment rates, given its significant effect on customers’ ability to meet contractual obligations. |
| ● | GDP growth rates, given their significant effect on borrowers’ performance. |
| ● | Loans – Mortgage, given that change in the purposesreal estate market have broader economic implications and vice versa. |
| ● | Real estate housing prices, given its importance as the measure of expected credit loss measurement according to IFRS 9.the rate at which the prices of residential properties purchased by households are changing over time. |
The associated impact of these macroeconomic factors and certain portfolio factors on the PD and LGD vary by loan type. Expert judgment has also been applied in this process. Forecasts of these factors (“baseline economic scenario”) are provided by the Bank´s Research and Public Policy area on a periodic basis and offer the best estimate view of the economy over the next three years. After three years, to project these factors out for the full remaining lifetime of each financial asset, a mean reversion approach has been used. With this approach, the projected factors in the long-term will have statistical patterns such as average rate (i.e., for unemployment) or a growth rate (i.e., GDP) over a period of two to five years. The impact of these factors on the PD, EAD and LGD has been determined by performing statistical regression analysis to understand the impact changes in these factors have had historically on default rates and on the components of LGD and EAD. In addition to the baseline economic scenario, the Bank´s Research and Public Policy area also provides other possible scenarios along with scenario weightings. The number of other scenarios used is set based on the analysis of each major financial asset type to ensure nonlinearities are considered. The number of scenarios and their attributes are reassessed on a quarterly basis. For all financial assets portfolios, the Bank concluded that three scenarios appropriately consider nonlinearities. The scenario weightings are determined by a combination of statistical analysis and expert judgment, taking into account the range of possible outcomes each chosen scenarios is representative. These weightings are presented for approval by the executive risk committee. The assessment of significant increase in credit risk is performed using the “Lifetime PD” under each of the baseline and the other two scenarios (“upside” and “downside”) multiplied by the associated scenario weighting, along with qualitative and backstop indicators. This determines whether the financial asset is in Stage 1, Stage 2 or Stage 3 and hence whether twelve-month ECL or “Lifetime” ECL should be recognized. Following this assessment, either the Bank measures ECL as a probability weighted twelve-month ECL (Stage 1) or a probability weighted “Lifetime” ECL (Stage 2 and Stage 3). These probability-weighted ECL are determined by running each scenario (“baseline”, “upside” and “downside”), through the relevant ECL model and multiplying it by the appropriate scenario weighting (as opposed to weighting the inputs). As with any forecast, the projection and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. Moreover, applying expert judgment in measuring expected credit losses requires the use of assumptions, which are highly subjective and very sensitive to macroeconomic changes and credit conditions. The Bank considers these forecasts to represent its best estimate of the possible outcomes and has analyzed the nonlinearities and asymmetries within the Bank´s different financial assets portfolios to establish that the chosen scenarios are appropriately representative of the range of possible scenarios. The factors used for the ECL estimate as of December 31, 2022 are set out below. The “baseline”, “upside” and “downside” scenarios were used for all financial assets portfolios, except for global corporates for which the Bank applies the same global macroeconomic scenarios as Banco Santander (Spain). Risk parameters, including a forward-looking add-ons for this portfolio, are provided by Banco Santander (Spain). | | | | | | | | | | | | | | | | | | | | | | December 31, 2022 | Factor | | | Scenario | | | December 2022 | | | December 2023 | | | December 2024 | | | December 2025 | | | | | Baseline | | | 3.50% | | | 0.18% | | | 1.29% | | | 1.67% | | GDP
(% year over year) | | | Upside | | | 3.50% | | | 2.10% | | | 3.92% | | | 2.94% | | | | | Downside | | | 3.50% | | | (5.16)% | | | (6.78)% | | | 1.15% | | | | | Baseline | | | 8.37% | | | 5.33% | | | 4.19% | | | 3.87% | | CPI
(% year over year) | | | Upside | | | 8.37% | | | 3.74% | | | 2.98% | | | 3.00% | | | | | Downside | | | 8.37% | | | 9.34% | | | 9.77% | | | 6.52% | | | | | Baseline | | | 3.16% | | | 3.37% | | | 3.49% | | | 3.56% | | Unemployment rates
(% active population) | | | Upside | | | 3.16% | | | 3.22% | | | 3.18% | | | 3.16% | | | | | Downside | | | 3.16% | | | 4.89% | | | 5.98% | | | 5.69% | | | | | Baseline | | | 20.29 | | | 20.86 | | | 21.30 | | | 21.71 | | Peso/USD
(average of period) | | | Upside | | | 20.29 | | | 19.39 | | | 18.94 | | | 19.13 | | | | | Downside | | | 20.29 | | | 27.91 | | | 25.27 | | | 24.67 | | | | | Baseline | | | 10.75% | | | 9.91% | | | 9.53% | | | 9.40% | | Loans - Mortgage
(% year over year) | | | Upside | | | 10.75% | | | 11.89% | | | 11.66% | | | 10.88% | | | | | Downside | | | 10.75% | | | (3.66)% | | | 0.18% | | | 2.85% | | | | | Baseline | | | 13.51% | | | 9.67% | | | 8.35% | | | 7.60% | | Loans - Consumer
(% year over year) | | | Upside | | | 13.51% | | | 12.02% | | | 10.90% | | | 10.01% | | | | | Downside | | | 13.51% | | | (21.23)% | | | 1.06% | | | 4.46% | | | | | Baseline | | | 5.57% | | | 6.52% | | | 6.12% | | | 5.77% | | Investment funds
(% year over year) | | | Upside | | | 5.57% | | | 13.24% | | | 10.71% | | | 7.44% | | | | | Downside | | | 5.57% | | | (6.09)% | | | (4.24)% | | | 2.58% | | | | | Baseline | | | 7.94% | | | 7.55% | | | 7.55% | | | 7.55% | | Real Estate housing prices
(% year over year) | | | Upside | | | 7.94% | | | 10.19% | | | 9.75% | | | 8.64% | | | | | Downside | | | 7.94% | | | 1.76% | | | 1.31% | | | 3.92% | | | | | Baseline | | | 45,195.97 | | | 47,546.16 | | | 50,018.56 | | | 52,619.52 | | Stock markets
(level) | | | Upside | | | 45,195.97 | | | 58,245.08 | | | 61,818.33 | | | 65,610.78 | | | | | Downside | | | 45,195.97 | | | 31,696.64 | | | 39,901.69 | | | 41,811.04 | |
The weightings assigned to each macroeconomic scenario as of December 31, 2021 and 2022 were as follows: | | | | | December 31, 2022 | Scenario | | | Weighting | | | | | Base | | | 50.0% | | Upside | | | 15.0% | | Downside | | | 35.0% | | | | | |
| | | | | December 31, 2021 | Scenario | | | Weighting | | | | | Base | | | 55.0% | | Upside | | | 15.0% | | Downside | | | 30.0% | | | | | |
Sensitivity analysis The ECL recognized in the consolidated balance sheet as of December 31, 2022 reflects the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, according to the scenarios described above. Many of the factors and assumptions used to calculate ECL have a high degree of interdependency and there is not a single factor or assumption to which the ECL, as a whole, are sensitive. The ECL determined by using the “base” scenario, which is used to calculate an unbiased expected credit loss, provides an indication of the overall sensitivity of ECL to different macroeconomic assumptions. Set out below are the changes to the ECL as of December 31, 2022 that would result from reasonably possible changes in the weightings from the actual assumptions used in the Bank’s macroeconomic scenarios, considering a weightings of 100% for the most favorable scenario and a weighting of 100% for the least favorable scenario: | | | | | | | | | | | Most Favorable | | | Least Favorable | | | | | Scenario | | | Scenario | | | | | | | | | | Retail loan portfolio | | | (19.7)% | | | 17.7% | | Non-retail loan portfolio | | | (16.4)% | | | 14.0% | | | | | | | | | |
Written-off loans The entire loan balance relating to credit-impaired financial assets continues to be recognized in the consolidated balance sheet for their full amounts, until the recovery of any recognized amount is considered to be unlikely. The recovery of a loan is considered to be unlikely when there is a significant and irreversible deterioration of the borrower’s overall financial condition, resources, value of any guarantees and payment record that would lead a borrower to bankruptcy. When the recovery of a loan is considered to be unlikely, it is written-off together with the corresponding allowance for impairment losses from the consolidated balance sheet without prejudice to any actions that the Bank may initiate to seek collection until their contractual rights are extinguished due to the expiration of the statute-of-limitations period, forgiveness or any other cause. Loans and the corresponding allowance for impairment losses are normally written-off considering the following: | ● | Commercial, financial and industrial loans are evaluated on a rebuttable presumption that default does not occur later thancase-by-case basis; as such, write-off will only take place after considering all relevant information such as the occurrence of a significant change in the borrower’s financial position, guarantees and collaterals and payment records. Within this portfolio, small and medium-sized enterprises loans and revolving small and medium-sized enterprises loans are written-off when a financial asset is ninetythe loans become 181 and 151 days past due, unless there is reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate. Conversely, where payment holidaysrespectively. |
| ● | Mortgage loans are introduced, during which borrowers are permitted to defer certain payments, such amounts may no longer bewritten-off when they have been past due for instancethirty-six months. |
| ● | For installment loans in the Support Program.Staging
The Bank’s staging analysis (and subsequent measurement of expected credit losses for loans in each stage) was affected by the expectationsto individuals, any portion of the duration and severity of the downturn caused by COVID-19 pandemic and the resulting recovery profile.
Staging requires an assessment and identification of a significant increase in credit risk and involves a number of quantitative and qualitative indicators. The impact of COVID-19 pandemic has a significant influence on the relevance of many of these indicators.
In staging analysis,balance that the Bank does not apply mechanically the identification of a significant increase inexpect to collect is generally written-off at 151 days past due for revolving consumer credit risk. Assessment of a significant increase in credit risk is based on reasonablecard loans and supportable information that is available without undue cost or effort.
The Bank applied a medium-long term approach when assessing the customer’s credit quality and considers if the customer is experiencing temporary financial difficulties in order to determine the correspondent classification (staging). Repayment capacity of the customer in the medium-term is also evaluated.
The Bank considered that:
| ● | Those customers that took advantage of the Support Program were not classified immediately into Stage 2 or Stage 3. |
| ● | Financial temporary difficulties derived from COVID-19 pandemic did not automatically result in the transfer from Stage 1 to Stage 2 or from Stage 1 to Stage 3.181 days past due for other non-revolving consumer loans. |
| ● | Contractual modifications did not result automatically in the classification into forbearance or Stage 2. |
| ● | Customers (revolving and non-revolving) granted with an extension (restructuring) after the payment moratoria (Support Program) were classified in Stage 2. |
| ● | Certain customers (commercial and Santander Corporate and Investment Banking) granted with an extension after the payment moratoria (Support Program) were classified in Stage 2. This classification was assessed on a case-by-case basis. |
| ● | Customers that were classified as Stage 3 prior to COVID-19 pandemic did not comply with the requirements established for the application of the Support Program. |
| ● | At the beginning of COVID-19 pandemic, customers that were part of the Support Program were not automatically considered as “Normal risk under watchlist” (Stage 2). |
| ● | In the case that customers experienced financial difficulties from different reasons to COVID-19 pandemic, or if the customer is unlikely to restore its credit worthiness after the COVID-19 pandemic, these circumstances were considered for the appropriate classification (staging) of the customer. |
In the event of bankruptcy or similar proceedings, write-off may occur earlier than at the periods stated above. Collections procedures may continue after write-off. h) Repurchase agreements and Reverse repurchase agreements Purchases of financial instruments under a non-optional resale agreement at a fixed price are measured at fair value and recognized as assets in the consolidated balance sheet under Loans and advances to credit institutions – Reverse repurchase agreements or Loans and advances to customers – Reverse repurchase agreements. The excess of the purchase prices over the resale prices are recognized as interest income over the contract term. Sales of financial instruments under a non-optional repurchase agreement at a fixed price are measured at amortized cost or at fair value and recognized as liabilities in the consolidated balance sheet under Deposits from the Central Bank – Repurchase agreements, Deposits from credit institutions – Repurchase agreements or Customer deposits – Repurchase agreements. The excess of the sales prices over the repurchase prices are recognized as interest expense over the contract term. Repurchase agreements and reverse repurchase agreements are managed and its performance is evaluated on a fair value basis. i) Non-current assets held for sale Non-current assets held for sale include the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal (discontinued operations), whose sale is highly likely to be completed within one year from the reporting date. Therefore, the recovery of the carrying amount of these items will foreseeably be effected through the proceeds from their disposal. For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active program to locate a buyer and complete the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Specifically, property or other non-current assets received by the Bank as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the Bank has decided to make continuing use of these assets. Liabilities associated with non-current assets held for sale include the balances payable arising from the assets held for sale or disposal groups and from discontinued operations. Non-current assets held for sale are measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category. The Bank’s credit systems automatically considered that a payment holiday is evidence of a significant increase in credit risk. Such systems needed to be amended to reflect that in the COVID-19 pandemic environment not all payment holidays were necessarily indicative of a significant increase in credit risk.
Scores
The effects of COVID-19 pandemic and the Support Program went beyond changes in credit conditions and impacted behavioral scores as the customer transactional pattern was modified due to the closure of most productive activities. Since IFRS 9 expected credit loss model considers these scores to determine the PD, which is a key input in the measurement of expected credit losses, the PD could be artificially worsened or improved and even the classification of customers in Stage 2 due to the use of PD thresholds in determining a significant increase in credit risk. Therefore, the Bank monitored the variables that compose the scores and depending on the available information, decided to keep scores’ information prior to the COVID-19 pandemic (March 2020), isolating the effects generated by the payment moratoria.
In August 2020, as the non-enforceability period of the Support Program ended, an ‘unfreezing’ or ‘defrosting’ strategy was defined in which the affected variables were identified in terms of the duration that said impact would remain in scores’ information after the end of the Support Program, as diverse variables use several months of data.
Rating
COVID-19 pandemic caused an unexpected crisis that is considered temporary.
Due to the COVID-19 pandemic environment, the Bank analyzed whether adjustments or improvements should be made in ratings to reflect adequately the level of credit risk, but with a medium-term approach.
The Bank monitors the behavior of ratings and in case of atypical movements; measures are taken to avoid an excessive impact on the expected credit losses.
Long-Run Scenario
IFRS 9 requires that measurement of expected credit losses must be based on reasonable and supportable information that is available without undue cost or effort.
The Bank did not incorporate macroeconomic scenarios in a mechanistic manner into the IFRS 9 expected credit loss model considering COVID-19 economic environment, since the figures obtained from the IFRS 9 model could result contrary to its economic sense.
Based on the economic conditions caused by COVID-19 pandemic, the Bank applied a long-run macroeconomic scenario in the context of a long-term stable outlook where the structural deterioration emerged in order to quantify the overlay related to the macroeconomic worsening (macroeconomic overlay).
As macroeconomic forecasts stabilize, the Bank will determine whether, at what time and under what conditions, should the macroeconomic perspectives be incorporated into IFRS 9 expected credit loss model.
Expert judgment
As stated by the several regulators and supervisors, the application of IFRS 9 requires the use of judgment in the assessment and measurement process of expected credit losses.
Based on the uncertainty surrounding the COVID-19 pandemic and its unique characteristics, as well as its expected temporary nature, the Bank considered the inclusion of qualitative factors based on expert judgment and always applied after following the appropriate governance, to attenuate undesired negative effects arising from potential deficiencies in models and IT systems, among others, that could preclude the Bank from correctly reflecting the effects of the COVID-19 pandemic in the IFRS 9 expected credit loss model.
Risk monitoring
Rigorous risk monitoring remains even more crucial under the COVID-19 pandemic circumstances. Although most regulators and supervisors allow some degree of flexibility concerning credit quality classification and forbearance, they also require absolute rigorousness when analyzing the situation. Several regulators and supervisors have also stated that it is necessary to continue monitoring the credit quality/creditworthiness of customers in order to classify them correctly always with a medium-
long term vision, based on the contractual schedules and using information that can be classified as reliable and supportable.
Such monitoring is more complex in the COVID-19 economic environment, where installments from loans subject to the Support Program were deferred from their original due date. To overcome this, and additionally to applying all the related customer monitoring Bank’s policies, all available information had to be used, including but not restricted to:
| ● | Interest repayment in case of payment holidays applying only to the principal of a loan. |
| ● | Other loans from the same customer with the Bank. |
| ● | Loans in other entities (information to be received through credit bureaus). |
| ● | Financial information of the customer: average current account balance, availability/use of limits, etc. |
| ● | Behavioral variables (the input of behavioral scoring models). |
| ● | Information gathered from the customers through surveys, phone calls, forms, etc. It can include the customer participation in the Support Program. |
As indicated previously, payment moratoria did not automatically mean a significant increase in credit risk or credit impairment; nor should the assumption be that all the loans involved remained in Stage 1 without further consideration to other potential impairment signs. As such, the Bank’s continuous customer and loan portfolio monitoring can lead to transfer to Stage 2:
a) | | Customers who, according to the abovementioned indicators, have suffered a significant increase in credit risk beyond the reasonable effectively period of the relief measures. |
b) | | A collective assessment was performed in order to determine which percentage of the portfolio should be transferred to Stage 2. The Bank ensured that the drivers considered under the collective assessment do not overlap with those already taken into account by macroeconomic factors or under the individual basis. |
The Bank passes through appropriate governance the criteria used to perform both the individual and collective assessment for staging under IFRS 9 of customers and loan portfolio under COVID-19 pandemic circumstances.
Impact on models
Looking towards 2021, the identification of all the customers for which the Support Program was applied will enable the Bank to isolate from current risk models all exceptional effects of COVID-19 pandemic. The target of the Bank is that the databases, time series and other information used in the development, validation and recalibration of existing and new risk models is not involuntarily affected by the extraordinary circumstances of COVID-19 pandemic that are also estimated to be temporary. This includes rating and scoring models as they could also be affected by what is refer to as anomalous historic data.
These data, for risk management purposes, is also very useful to anticipate future similar crisis or in order to conduct scenario analysis, resilience tests, etc. by the Bank. It is therefore critical to appropriately identify, classify and store all indicators and information available concerning loans and
customers that go through exceptional mitigating measures, their performance and credit quality profile, among others.
Post-model adjustments - overlays
Estimating the expected credit losses under IFRS 9 often use a three-step process: 1) develop judgments about the future; 2) apply those judgments to statistical models developed based on historical relationships; and 3) use relevant data to feed into the model. This often involves more statistical modelling and data than most other accounting estimates, and it might be very difficult in the current environment.
IASB acknowledges that it is likely to be difficult at this time to incorporate the specific effects of the COVID-19 pandemic and government support measures on a reasonable and supportable basis. When it is not possible to reflect such information in models, the IASB expects post-model adjustments or overlays to be considered.
Post-model adjustment or overlay is a term that can be used to describe a spectrum of adjustments that are made outside the IFRS 9 expected credit loss model. In some cases, the term can refer to straightforward adjustments in order to correct known model errors or data deficiencies. In others, the overlay is far more subjective and judgmental. For example, it sometimes refers to the application of expert credit judgment to address gaps in models, data or both (for example, as new risks or uncertainties arise). It can also refer to adjustments made to capture risks and uncertainties, which are not captured by the model because the model were not designed to address them, such as COVID-19 pandemic.
Extreme economic conditions – coupled with uncertainty around the duration of the COVID-19 pandemic, potential for relapses, effects of government support or lack of it, and what recovery will ultimately look like (“V shaped” or “U shaped”) – mean that forward-looking judgments are highly uncertain and challenging to make. At the same time, historical relationships between key variables might no longer hold, and comparable economic conditions might not have existed in the past. Lockdown and social distancing effects and timeframes need to be expressed in terms of impact on macroeconomic drivers and, ultimately, on default rates. Therefore, it is not possible to adapt the IFRS 9 expected credit loss model in the short-term to capture all of these factors and uncertainties and the use of significant post-model adjustments or overlays is needed when estimating expected credit losses in order to take account of the risks and uncertainties that cannot be adequately reflected in the existing expected credit loss models.
In estimating post-model adjustments or overlays, the Bank considered historical experience. However, it is clear that the widespread nature and severity of the consequences of the COVID-19 pandemic is not directly comparable with any recent similar events. The Bank plotted several possible scenarios of what might happen over the coming months and assign weightings to them, to ensure that any post-model adjustment or overlay reflects the inherent uncertainty and non-linearity of potential outcomes.
From the beginning of COVID-19 pandemic, increasing uncertainty began to appear in the macroeconomic environment without having clear view of its impact or duration. These conditions began to be reflected in the macroeconomic scenarios corresponding to the second quarter of 2020, where variables such as GDP or the exchange rate presented levels that had never been reached in other crises.
The Bank decided as of December 31, 2020 to recognize a “macroeconomic overlay”, which was calculated with a long-run vision in order to avoid short-term volatility, which was determined from a softening of the macroeconomic scenario that the Bank uses in its annual planning exercise with a three-year horizon.
This “macroeconomic overlay” was calculated under a bottom-up approach, aligned with the ‘business as usual’ (BAU) process of forward-looking calculation, where the sensitivity resulting from the expected credit losses, at a credit level, is distributed for each of the loan portfolio.
One of the first effects derived from the application of the Support Program was the artificial decrease in the arrears of the loan portfolio. With the purpose of addressing this situation; the Bank recognized a “normalization overlay”, which was based on the historical roll-rates of each loan portfolio in order to calculate the expected credit losses in case that the customers, which took advantage of the Support Program, resulted credit-impaired. Due to the fact that the validity of the Support Program ended in September 2020, the “normalization overlay” is no longer recognized as of December 31, 2020.
Additionally, in June 2020 and before the term of the Support Program expired, the Bank recognized an “impairment overlay” by collective assessment, in order to anticipate the customers’ credit impairment, which after an objective analysis, could require to be restructured after the end of the Support Program.
The Bank carried out the identification of these customers with information available in the banking system and based on a survey performed with customers that took advantage of the Support Program, assuming that these customers will present financial difficulties and therefore would be classified in Stage 2.
During December 2020, considering that the Support Program has already finalized and the loan portfolio are already converging to their natural behaviour, the Bank assessed if the “impairment overlay” should continue to be fully recognized in the consolidated financial statements at the end of the reporting period. In this regard, the Bank decided to recognize as of December 31, 2020 an “impairment overlay” related only to the loans for which an extension of the Support Program (second payment moratoria) was granted.
These post-model adjustments or overlays recognized as of December 31, 2020 are well controlled, authorized and documented.
Details of post-model adjustments – overlays is presented in Note 11.d.
Expected life of the financial assets
For the purpose of estimating the expected life of the financial assets, all the contractual terms have been taken into account (i.e., prepayments, duration, purchase options, etc.), being the contractual period (including extension options) the maximum period considered to measure the expected credit losses. In the case of financial assets with an uncertain maturity period and a component of undrawn commitment (i.e., credit cards), the expected life is estimated through quantitative analyses to determine the period during which the entity is exposed to credit risk, also considering the effectiveness of management procedures that mitigate such exposure (e.g. the ability to unilaterally cancel such financial asset, etc.).
Effective guarantees
The following constitute effective guarantees:
| a)
| Mortgage guarantees on housing as long as they are first duly constituted and registered in favor of the Bank. The properties include:
|
i. Buildings and building elements, distinguishing among:
| ● | Offices, stores and multi-purpose premises; |
| ● | Rest of buildings such as non-multi-purpose premises and hotels. |
ii. Urban and developable ordered land.
iii. Rest of properties that classify as: buildings and building elements under construction, such as property development in progress and halted development, and the rest of land types, such as rustic lands.
Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized. | b)
| Collateral guarantees on financial instruments in the form of cash deposits and debt securities issued by creditworthy issuers.
|
| c)
| Other types of real guarantees, including properties received in guarantee and second and subsequent mortgages on properties, as long as the entity demonstrates its effectiveness. When assessing the effectiveness of the second and subsequent mortgages on properties the entity will implement particularly restrictive criteria. It will take into account, among others, whether the previous charges are in favor of the entity itself or not and the relationship between the risk guaranteed by them and the property value.
|
| d)
| Personal guarantees, as well as the incorporation of new owners, covering the entire amount of the financial instruments and implying direct and joint liability to the entity of persons or other entities whose solvency is sufficiently proven to ensure the repayment of the loan on the agreed terms.
|
Forward-looking information incorporated in the expected credit losses models
The Bank already uses forward-looking information in internal administration and regulatory processes and has leveraged its experience in the management of such information, maintaining consistency with the information used in the other processes. The assessment of significant increase in credit risk and the calculation of expected credit losses both incorporate forward-looking information.
The Bank has performed historical analysis and identified the key macroeconomic and portfolio factors affecting credit risk and expected credit losses for each financial assets portfolio.
The following represent the most significant macroeconomic factors that could substantially change the estimated expected credit losses:
| ● | GDP growth rates, given their significant effect on borrowers’ performance. |
| ● | Loans – Mortgage, given that change in the real estate market have broader economic implications and vice versa. |
| ● | Unemployment rates, given its significant effect on customers’ ability to meet contractual obligations. |
| ● | CPI, given its overall relevance for entities’ performance, customers’ purchasing power and economic stability. |
| ● | Peso/USD exchange rate, given its substantial influence on operations and profitability. |
| ● | Loans – Consumer, given its relation to personal income and saving as a source of consumer purchasing power. |
| ● | Deposits – Total, given its impact on how much of a bank’s core funds can be used for lending. |
| ● | Stock markets, given its considered critical to economic development as it gives companies the ability to quickly access capital from the public. |
The associated impact of these macroeconomic factors and certain portfolio factors on the PD and LGD vary by type of financial asset. Expert judgment has also been applied in this process. Forecasts of these factors (“base economic scenario”) are provided by the Bank´s Research and Public Policy area on a periodic basis and offer the best estimate view of the economy over the next three years. After three years, to project these factors out for the full remaining lifetime of each financial asset, a mean reversion approach has been used. With this approach, the projected factors in the long-term will have statistical patterns such as average rate (i.e., for unemployment) or a growth rate (i.e., GDP) over a period of two to five years.
The impact of these factors on the PD, EAD and LGD has been determined by performing statistical regression analysis to understand the impact changes in these factors have had historically on default rates and on the components of LGD and EAD.
In addition to the base economic scenario, the Bank´s Research and Public Policy area also provide other possible scenarios along with scenario weightings. The number of other scenarios used is set based on the analysis of each major financial asset type to ensure nonlinearities are considered. The number of scenarios and their attributes are reassessed on a quarterly basis. For all financial assets portfolios, the Bank concluded that three scenarios appropriately consider nonlinearities. The scenario weightings are determined by a combination of statistical analysis and expert judgment, taking into account the range of possible outcomes each chosen scenarios is representative. These weightings are presented for approval by the executive risk committee.
The assessment of significant increase in credit risk is performed using the “Lifetime PD” under each of the base and the other two scenarios (“upside” and “downside”) multiplied by the associated scenario weighting, along with qualitative and backstop indicators. This determines whether the financial asset is in Stage 1, Stage 2 or Stage 3 and hence whether twelve-month ECL or “Lifetime” ECL should be recognized. Following this assessment, either the Bank measures ECL as a probability weighted twelve-month ECL (Stage 1) or a probability weighted “Lifetime” ECL (Stage 2 and Stage 3). These probability-weighted ECL are determined by running each scenario (“base”, “upside” and “downside”), through the relevant ECL model and multiplying it by the appropriate scenario weighting (as opposed to weighting the inputs).
As with any forecast, the projection and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. Moreover, applying expert judgment in measuring expected credit losses requires the use of assumptions, which are highly subjective and very sensitive to macroeconomic changes and credit conditions. The Bank considers these forecasts to represent its best estimate of the possible outcomes and has analyzed the nonlinearities and asymmetries within the Bank´s different financial assets portfolios to establish that the chosen scenarios are appropriately representative of the range of possible scenarios.
The factors used for the ECL estimate as of December 31, 2020 are set out below. The “base”, “upside” and “downside” scenarios were used for all financial assets portfolios, except for global corporates for which the Bank applies the same global macroeconomic scenarios as Banco Santander (Spain). Risk parameters, including a forward-looking add-ons for this portfolio, are provided by Banco Santander (Spain).
| | | | | | | | | | | | | | | | | | | | | | December 31, 2020: | | Factor | | | Scenario | | | December 2020 | | | December 2021 | | | December 2022 | | | December 2023 | | | | | Base | | | 0.73% | | | 1.45% | | | 1.70% | | | 1.70% | | GDP
(% year over year) | | | Upside | | | 1.92% | | | 2.35% | | | 2.80% | | | 3.10% | | | | | Downside | | | (7.10)% | | | 0.00% | | | 0.80% | | | 1.20% | | | | | Base | | | 3.60% | | | 3.50% | | | 3.50% | | | 3.50% | | CPI (% year over year) | | | Upside | | | 3.38% | | | 3.20% | | | 2.90% | | | 2.92% | | | | | Downside | | | 8.40% | | | 8.78% | | | 7.60% | | | 6.30% | | | | | Base | | | 3.74% | | | 4.02% | | | 4.27% | | | 4.42% | | Unemployment rates (% active population) | | | Upside | | | 3.40% | | | 3.51% | | | 3.67% | | | 3.66% | | | | | Downside | | | 6.57% | | | 7.27% | | | 5.61% | | | 5.06% | | | | | Base | | | 19.68 | | | 20.32 | | | 20.62 | | | 20.94 | | Peso/USD (end of period) | | | Upside | | | 19.09 | | | 18.28 | | | 18.56 | | | 18.85 | | | | | Downside | | | 25.57 | | | 25.66 | | | 24.53 | | | 23.87 | | | | | Base | | | 9.10% | | | 8.90% | | | 8.50% | | | 8.50% | | Loans - Mortgage (% year over year) | | | Upside | | | 10.25% | | | 11.04% | | | 10.90% | | | 11.16% | | | | | Downside | | | (4.50)% | | | (0.20)% | | | 1.40% | | | 4.20% | | | | | Base | | | 6.10% | | | 5.85% | | | 5.83% | | | 5.79% | | Loans - Consumer
(% year over year) | | | Upside | | | 7.32% | | | 8.12% | | | 8.37% | | | 8.62% | | | | | Downside | | | (7.40)% | | | 0.39% | | | 2.48% | | | 4.69% | | | | | Base | | | 4.34% | | | 4.93% | | | 5.17% | | | 5.06% | | Deposits - Total (% year over year) | | | Upside | | | 5.37% | | | 7.91% | | | 7.19% | | | 7.23% | | | | | Downside | | | (3.43)% | | | (2.37)% | | | (0.14)% | | | 1.73% | | | | | Base | | | 44,672.92 | | | 46,995.91 | | | 49,439.70 | | | 52,010.57 | | Stock markets (level) | | | Upside | | | 45,041.47 | | | 48,238.04 | | | 53,896.65 | | | 60,543.31 | | | | | Downside | | | 34,264.49 | | | 30,717.74 | | | 31,697.27 | | | 32,977.75 | |
The factors used for ECL estimates related to post-model adjustments or overlays as of December 31, 2020 were as follows:
| | | | | | | | | | | | | | | | | Factor | | | Scenario | | | December 2020 | | | December 2021 | | | December 2022 | | | December 2023 | | GDP
(% year over year) | | | Long-run | | | (0.89)% | | | (1.26)% | | | (0.06)% | | | 2.15% | | CPI
(% year over year) | | | Long-run | | | 3.12% | | | 4.13% | | | 2.63% | | | 3.25% | | Unemployment rates
(% active population) | | | Long-run | | | 4.08% | | | 5.33% | | | 4.56% | | | 4.36% | | Peso/USD
(end of period) | | | Long-run | | | 23.29 | | | 22.45 | | | 22.66 | | | 22.95 | | Loans - Mortgage
(% year over year) | | | Long-run | | | 3.60% | | | 4.76% | | | 6.69% | | | 7.75% | | Loans - Consumer
(% year over year) | | | Long-run | | | (8.76)% | | | (11.37)% | | | 3.09% | | | 4.88% | | Deposits - Total
(% year over year) | | | Long-run | | | (1.28)% | | | (0.17)% | | | 2.58% | | | 4.68% | | Stock markets
(level) | | | Long-run | | | 41,141.19 | | | 38,183.86 | | | 39,479.06 | | | 41,531.98 | |
The weightings assigned to each macroeconomic scenario as of December 31, 2019 and 2020 were as follows:
| | | | | December 31, 2020
| Scenario
|
|
| Weighting
|
|
|
|
| Base
|
|
| 52.5%
|
| Upside
|
|
| 10.0%
|
| Downside
|
|
| 37.5%
|
|
|
|
|
|
| | | | | December 31, 2019
| Scenario
|
|
| Weighting
|
|
|
|
| Base
|
|
| 52.5%
|
| Upside
|
|
| 10.0%
|
| Downside
|
|
| 37.5%
|
|
|
|
|
|
Sensitivity analysis
The ECL recognized in the consolidated balance sheet as of December 31, 2020 reflect the effect on expected credit losses of a range of possible outcomes, calculated on a probability-weighted basis, according to the scenarios described above. Many of the factors and assumptions used to calculate ECL have a high degree of interdependency and there is not a single factor or assumption to which ECL, as a whole, are sensitive. The ECL determined by using the “base” scenario, which is used to calculate an unbiased expected credit loss, provides an indication of the overall sensitivity of ECL to different macroeconomic assumptions.
Set out below are the changes to the ECL as of December 31, 2020 that would result from reasonably possible changes in the weightings from the actual assumptions used in the Bank’s macroeconomic scenarios, considering a weightings of 100% for the most favorable scenario and a weighting of 100% for the least favorable scenario:
| | | | | | | | | | | Most Favorable | | | Least Favorable | | | | | Scenario | | | Scenario | | | | | | | | | | Retail loan portfolio | | | (9.7)% | | | 13.9% | | Non-retail loan portfolio | | | (9.2)% | | | 8.8% | | | | | | | | | |
Written-off loans
The entire loan balance relating to credit-impaired financial assets continue to be recognized in the consolidated balance sheet for their full amounts, until the recovery of any recognized amount is considered to be unlikely. The recovery of a loan is considered to be unlikely when there is a significant and irreversible deterioration of the borrower’s overall financial condition, resources, value of any guarantees and payment record that would lead a borrower to bankruptcy.
When the recovery of a loan is considered to be unlikely, it is written-off together with the corresponding allowance for impairment losses from the consolidated balance sheet without prejudice to any actions that the Bank may initiate to seek collection until their contractual rights are extinguished due to the expiration of the statute-of-limitations period, forgiveness or any other cause.
Loans and the corresponding allowance for impairment losses are normally written-off considering the following:
| ● | Commercial, financial and industrial loans are evaluated on a case-by-case basis; as such, write-off will only take place after considering all relevant information such as the occurrence of a significant change in the borrower’s financial position, guarantees and collaterals and payment records. Within this portfolio, small and medium-sized enterprises loans and revolving small and medium-sized enterprises loans are written-off when the loans become 181 and 151 days past due, respectively. |
| ● | Mortgage loans are written-off when they have been past due for thirty-six months. |
| ● | For installment loans to individuals, any portion of the balance that the Bank does not expect to collect is generally written-off at 151 days past due for revolving consumer credit card loans and 181 days past due for other non-revolving consumer loans. |
In the event of bankruptcy or similar proceedings, write-off may occur earlier than at the periods stated above. Collections procedures may continue after write-off.
h) Change in accounting estimates and accounting policies
Initial adoption of IFRS 16
The Bank has adopted IFRS 16 from January 1, 2019.
On adoption of IFRS 16, the Bank recognized lease liabilities in relation to leases, which had previously been classified as ‘operating leases’ under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments; discounted using the lessee’s incremental borrowing rate and the Bank recognized right-of-use assets, which was initially measured at cost as of January 1, 2019.
For leases previously classified as finance leases, the Bank recognized the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. The measurement principles of IFRS 16 are only applied after that date.
In applying IFRS 16 for the first time, the Bank has used the following practical expedients permitted by the standard:
| ● | accounting for operating leases with a remaining lease term of less than twelve months as of January 1, 2019 as short-term leases, and |
| ● | excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application. |
The Bank 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 Bank relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement Contains a Lease.
Following is an analysis of initial measurement of lease liabilities:
| | | | |
|
|
|
|
| IAS 17 operating lease commitments based on gross cash flows disclosed as of December 31, 2018
| |
| 10,015
|
| Discounted using the Bank’s incremental borrowing rate of 11%
| |
| 6,090
|
| Add/(less): adjustments due to different treatment of extension and termination options
|
|
| 801
|
| (Less): contracts to which the short-term leases exemption has been applied
|
|
| 77
|
| (Less): services/non-lease components of lease contracts
| |
| 80
|
| IFRS 16 lease liability as of January 1, 2019
|
|
| 6,734
|
|
On transition to IFRS 16, the Bank recognized 6,734 million pesos of right-of-use assets and of lease liabilities.
When measuring lease liabilities, the Bank discounted lease payments using the incremental borrowing rate as of January 1, 2019. The weighted-average rate applied was 11%.
i) Repurchase agreements and Reverse repurchase agreements
Purchases of financial instruments under a non-optional resale agreement at a fixed price are measured at fair value and recognized as assets in the consolidated balance sheet under Loans and advances to credit institutions – Reverse repurchase agreements or Loans and advances to customers – Reverse repurchase agreements.
The excess of the purchase prices over the resale prices are recognized as interest income over the contract term.
Sales of financial instruments under a non-optional repurchase agreement at a fixed price are measured at amortized cost or at fair value and recognized as liabilities in the consolidated balance sheet under Deposits from the Central Bank – Repurchase agreements, Deposits from credit institutions – Repurchase agreements or Customer deposits – Repurchase agreements.
The excess of the sales prices over the repurchase prices are recognized as interest expense over the contract term.
Repurchase agreements are designated as financial instruments at FVTPL when this designation eliminates or significantly reduces an accounting mismatch or when they are managed and its performance is evaluated on a fair value basis.
j) Non-current assets held for sale Non-current assets held for sale include the carrying amount of individual items, disposal groups or items forming part of a business unit earmarked for disposal (discontinued operations), whose sale is highly likely to be completed within one year from the reporting date. Therefore, the recovery of the carrying amount of these items will foreseeably be effected through the proceeds from their disposal.
Specifically, property or other non-current assets (foreclosed assets) received by the Bank as total or partial settlement of their debtors’ payment obligations to them are deemed to be non-current assets held for sale, unless the Bank has decided to make continuing use of these assets.
Liabilities associated with non-current assets held for sale include the balances payable arising from the assets held for sale or disposal groups and from discontinued operations.
Non-current assets held for sale are measured at the lower of fair value less costs to sell and their carrying amount at the date of classification in this category. Non-current assets held for sale are not depreciated as long as they remain in this category.
Impairment losses on an asset or disposal group arising from a reduction in its carrying amount to its fair value (less costs to sell) are recognized under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) in the consolidated income statement. The gains on a non-current asset held for sale resulting from subsequent increases in fair value (less costs to sell) increase its carrying amount and are recognized in the consolidated income statement up to an amount equal to the impairment losses previously recognized.
COVID-19 pandemic did not have a significant effect in the measurement of Non-current assets held for sale as of December 31, 2020.
k) Tangible assets
Tangible assets include the amount of buildings for own use, information technology (IT) equipment and fixtures, furniture and vehicles and other fixtures owned by the Bank. Tangible assets are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (excess of carrying amount over the recoverable amount). Depreciation is calculated using the straight-line method based on the acquisition cost of the tangible assets less their residual value. The land on which the buildings stand has an indefinite life and therefore is not depreciated. Depreciation is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets): | | | | | |
|
| Average Annual | | | | | Rate | | | | | | | Buildings for own use information | | | 2% to 5% | | Furniture and vehicles | | | 10% to 20% | | Information technology (IT) equipment and fixtures furniture and vehicles and other | | | 25% | | Other fixtures owned by the Bank. | Tangible assets are presented at acquisition cost, less the related accumulated depreciation and any estimated impairment losses (excess of carrying amount over the recoverable amount).
| Depreciation is calculated using the straight-line method based on the acquisition cost of the tangible assets less their residual value. The land on which the buildings stand has an indefinite life and therefore is not depreciated.
| Depreciation is recognized in the consolidated income statement and is calculated using the following depreciation rates (based on the average years of estimated useful life of the various assets):5% to 20%
|
|
|
| |
|
|
| Average Annual
|
|
|
|
| Rate
|
|
|
|
|
|
| Buildings for own use
| |
| 2% to 5%
|
| Furniture and vehicles
| |
| 10% to 20%
|
| Information technology equipment and fixtures
| |
| 25%
|
| Other fixtures
| |
| 5% to 20%
|
|
The Bank assesses at the reporting date whether there is any indication that a tangible asset may be impaired (i.e., its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the tangible asset is reduced to its recoverable amount and future depreciation charges are adjusted in
proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated).
COVID-19 pandemic did not trigger any indication that a tangible asset may be impaired as of December 31, 2020.
Similarly, if there is an indication of a recovery in the value of a tangible asset, the Bank recognizes the reversal of the impairment loss recognized in prior periods and adjusts the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on a tangible asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years.
The estimated useful lives of the tangible assets are reviewed at least at the end of the reporting period to identify significant changes therein. If changes are identified, the useful lives of the tangible assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years based on the new useful lives.
Upkeep and maintenance expenses relating to the tangible assets are recognized as an expense in the period in which they are incurred, since they do not increase the useful lives of the assets.
Tangible assets are derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the consolidated income statement.
l) Leases
The Bank as lessee
As explained in Note 2.h, the Bank has adopted IFRS 16 from January 1, 2019.
Until December 31, 2018, leases were classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases were classified as operating leases.
When the Bank acted as the lessee, the lease expenses, including any incentives granted by the lessor, were charged on a straight-line basis over the lease term to Other general administrative expenses in the consolidated income statement.
In the event that lease incentives were received to enter into operating leases, such incentives were recognized as a liability. The aggregate benefit of incentives was recognized as a reduction of rental expense on a straight-line basis.
Since January 1, 2019, the Bank assesses whether a contract is or contains a lease, at inception of the contract. The Bank recognizes a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee. Initially, the right-of-use asset is measured at cost, which comprises the amount of the lease liability, adjusted for any lease payment made in or before the commencement date less any lease incentives received, plus any other initial direct costs incurred by the lessee and an estimate of the costs for dismantling the underlying asset or for restoring the underlying asset or the site of its location.
Right-of-use assets are valued at cost, which includes the following:
●The amount of the initial measurement of the lease liability,
●Any lease payment made at or before the commencement date less any lease incentive received,
●Any initial direct costs incurred, and
●
|
The Bank assesses at the reporting date whether there is any indication that a tangible asset may be impaired (i.e., its carrying amount exceeds its recoverable amount). If this is the case, the carrying amount of the tangible asset is reduced to its recoverable amount and future depreciation charges are adjusted in proportion to the revised carrying amount and to the new remaining useful life (if the useful life has to be re-estimated). Similarly, if there is an indication of a recovery in the value of a tangible asset, the Bank recognizes the reversal of the impairment loss recognized in prior periods and adjusts the future depreciation charges accordingly. In no circumstances may the reversal of an impairment loss on a tangible asset raise its carrying amount above that which it would have if no impairment losses had been recognized in prior years. The estimated useful lives of the tangible assets are reviewed at least at the end of the reporting period to identify significant changes therein. If changes are identified, the useful lives of the tangible assets are adjusted by correcting the depreciation charge to be recognized in the consolidated income statement in future years based on the new useful lives. Upkeep and maintenance expenses relating to the tangible assets are recognized as an expense in the period in which they are incurred, since they do not increase the useful lives of the assets. Tangible assets are derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the consolidated income statement. k) Leases The Bank as lessee The Bank assesses whether a contract is or contains a lease, at inception of the contract. The Bank recognizes a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee. Initially, the right-of-use asset is measured at cost, which comprises the amount of the lease liability, adjusted for any lease payment made in or before the commencement date less any lease incentives received, plus any other initial direct costs incurred by the lessee and an estimate of the costs for dismantling the underlying asset or for restoring the underlying asset or the site of its location. Right-of-use assets are valued at cost, which includes the following: ●The amount of the initial measurement of the lease liability, ●Any lease payment made at or before the commencement date less any lease incentive received, ●Any initial direct costs incurred, and ●Restoration costs. Subsequently, the right-of-use asset is depreciated on the straight-line method from the commencement date to the lesser of the end of the useful life of the right-of-use asset or the end of the lease term. The estimate of the useful lives of the right-of-use asset is determined on the same bases as the assets. In addition, right-of-use asset is reduced for impairment, if any, and adjusted for the remeasurement of the lease liability. The Bank applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss. The right-of-use assets are presented as a separate line in the consolidated balance sheet. The lease liability is initially measured at the present value of the lease payments that have not been paid as of the commencement date, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use the incremental borrowing rate. Subsequently, the lease liability is measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. Lease payments included in the measurement of the lease liability comprise the following: | ● | Fixed payments, including in-substance fixed payments, less any lease incentive receivable; |
| ● | Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date. |
| ● | The amounts expected to be paid by the lessee under residual value guarantees; |
| ● | The exercise price of purchase options, if the lessee is reasonably certain to exercise that option; and | ● | Fixed payments, including in-substance fixed payments, less any lease incentive receivable; |
| ● | Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date. |
| ● | The amounts expected to be paid by the lessee under residual value guarantees; |
| ● | The exercise price of purchase options, if the lessee is reasonably certain to exercise that option; and |
| ● | Lease termination penalty payments, if the term of the lease reflects the lessee's exercise of that option. |
The lease liability is presented as a separate line in the consolidated balance sheet. The Bank remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: | ● | The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is presentedremeasured by discounting the revised lease payments using a revised discount rate. |
| ● | The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). |
| ● | A lease contract is modified and the lease modification is not accounted for as a separate linelease, in the consolidated balance sheet.The Bank remeasureswhich case the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:
| ● | The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. |
| ● | The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised |
| | lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). |
| ● | A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. |
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Bank, the lessee’s incremental borrowing rate is used, being the rate that the Bank would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.
To determine the incremental borrowing rate, the Bank applies the Cross Section methodology, which consists of estimating the credit spread of the Bank based on the CDS information available from different entities. Under the Cross Section methodology, the following factors are considered to obtain the Bank’s credit spread:
| ● | An assumption to represent that at least one factor described above, match with the factors related to the Bank. |
Lease payments are allocated between principal and finance cost. The finance cost is recognized under Interest expense and other charges in the consolidated income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Payments associated with short-term leases or low-value assets are recognized on a straight-line basis as an expense under Administrative expenses in the consolidated income statement. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise, for example, personal computers, printers, small itemsthe modified lease by discounting the revised lease payments using a revised discount rate at the effective date of office furniture, telephonesthe modification.
|
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is the case for leases in the Bank, the lessee’s incremental borrowing rate is used, being the rate that the Bank would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. To determine the incremental borrowing rate, the Bank applies the Cross Section methodology, which consists of estimating the credit spread of the Bank based on the CDS information available from different entities. Under the Cross Section methodology, the following factors are considered to obtain the Bank’s credit spread: | ● | Rating, and other similar assets.Whenever
|
| ● | An assumption to represent that at least one factor described above, match with the Bank incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying assetfactors related to the condition required by the terms and conditions of the lease, a provision is recognized and measured under IAS 37. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use assets.As of December 31, 2019 and 2020, the Bank did not have any lease agreements with purchase options.
The Bank as lessor - Finance leases
A lessor shall classify each of its leases as either an operating lease or a finance lease.
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract.Bank.
|
Lease payments are allocated between principal and finance cost. The finance cost is recognized under Interest expense and other charges in the consolidated income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
Payments associated with short-term leases or low-value assets are recognized on a straight-line basis as an expense under Administrative expenses in the consolidated income statement. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise, for example, personal computers, printers, small items of office furniture, telephones and other similar assets. Whenever the Bank incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognized and measured under IAS 37. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use assets. As of December 31, 2021 and 2022, the Bank did not have any lease agreements with purchase options. The Bank as lessor - Finance leases A lessor shall classify each of its leases as either an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. At the commencement date of the lease, the assets held by the Bank under a finance lease are recognized as Financial assets at amortized cost in the consolidated balance sheet at an amount equal to the net investment in the lease. The net investment in the lease corresponds to the gross investment in the lease discounted at the interest rate implicit in the lease. The gross investment in the lease is the sum of: (a)the lease payments receivable by a lessor under a finance lease; and (b)any unguaranteed residual value accruing to the lessor. IFRS 16 defines the interest rate implicit in the lease as the rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor. The Bank recognizes finance income over the lease term in interest income calculated using the effective interest method in the consolidated income statement, based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease. l) Intangible assets Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise because of a legal transaction or which are developed internally by the Bank. Only assets whose cost can be estimated reliably and from which the Bank considers it probable that future economic benefits will be generated are recognized. Intangible assets are recognized initially at acquisition or development cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses. i. Goodwill Any excess of the cost of the investments made by the Bank over the corresponding underlying carrying amounts acquired, adjusted at the acquisition date, is allocated as follows: | - | If it is attributable to specific and identifiable assets and liabilities of the subsidiaries acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired subsidiaries’ balance sheets. |
| - | If it is attributable to specific intangible assets, by recognizing such intangible assets in the consolidated balance sheet at an amount equal to the net investment in the lease. The net investment in the lease corresponds to the gross investment in the lease discounted at the interest rate implicit in the lease. The gross investment in the lease is the sum of:
(a)the lease payments receivable by a lessor under a finance lease; and
(b)any unguaranteed residual value accruing to the lessor.
IFRS 16 defines the interest rate implicit in the lease as the rate of interest that causes the present value of (a) the lease payments and (b) the unguaranteed residual value to equal the sum of (i)if the fair value of these assets within twelve months following the underlying asset and (ii) any initial direct costsdate of the lessor.
The Bank recognizes finance income over the lease term in Interest income in the consolidated income statement, based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease.
m) Intangible assets
Intangible assets are identifiable non-monetary assets (separable from other assets) without physical substance which arise because of a legal transaction or which are developed internally by the Bank. Only assets whose costacquisition can be estimated reliably and from which the Bank considers it probable that future economic benefits will be generated are recognized.
Intangible assets are recognized initially at acquisition or development cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.reliably.
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| i. Goodwill
Any excess of the cost of the investments made by the Bank over the corresponding underlying carrying amounts acquired, adjusted at the acquisition date, is allocated as follows:
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| If it is attributable to specific and identifiable assets and liabilities of the subsidiaries acquired, by increasing the value of the assets (or reducing the value of the liabilities) whose fair values were higher (lower) than the carrying amounts at which they had been recognized in the acquired subsidiaries’ balance sheets.
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| If it is attributable to specific intangible assets, by recognizing such intangible assets in the consolidated balance sheet if the fair value of these assets within twelve months following the date of acquisition can be measured reliably.
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| - | The remaining amount is recognized as goodwill, which is allocated to one or more CGU. A CGU is the smallest identifiable group of assets that, because of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. |
Goodwill is only recognized when it has been acquired for a consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired subsidiary that are not capable of being individually identified and separately recognized.
At the end of each reporting period, or whenever there is any indication of impairment, goodwill is reviewed for impairment (i.e., a reduction in its recoverable amount to below its carrying amount) and
if there is any impairment, the goodwill is written down with a charge to the consolidated income statement.
For the purposes of the impairment analysis, goodwill is allocated to one or more CGU expected to benefit from the synergies arising from business combinations. Each CGU to which goodwill is allocated:
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| is the lowest level at which the entity manages goodwill internally; and
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| is not larger than an operating segment.
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The CGU to which goodwill has been allocated are tested for impairment by including the allocated goodwill in their carrying amount. This analysis is performed at least annually as of December 31 and more frequently in cases where Bank’s Management notes indicators of impairment.
For determining the impairment of a CGU to which a part of goodwill has been allocated, the carrying amount of that unit is compared with its recoverable amount.
The recoverable amount of aCGU. A CGU is equal to the highersmallest identifiable group of the fair value less costs to sell and its value in use. Value in use is calculated as the discounted valueassets that, because of continuing operation, generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
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Goodwill is only recognized when it has been acquired for a consideration and represents, therefore, a payment made by the acquirer in anticipation of future economic benefits from assets of the acquired subsidiary that are not capable of being individually identified and separately recognized. At the end of each reporting period, or whenever there is any indication of impairment, goodwill is reviewed for impairment (i.e., a reduction in its recoverable amount to below its carrying amount) and if there is any impairment, the goodwill is written down with a charge to the consolidated income statement. For the purposes of the impairment analysis, goodwill is allocated to one or more CGU expected to benefit from the synergies arising from business combinations. Each CGU to which goodwill is allocated: | - | is the lowest level at which the entity manages goodwill internally; and |
| - | is not larger than an operating segment. |
The CGU to which goodwill has been allocated are tested for impairment by including the allocated goodwill in their carrying amount. This analysis is performed at least annually as of December 31 and more frequently in cases where Bank’s Management notes indicators of impairment. For determining the impairment of a CGU to which a part of goodwill has been allocated, the carrying amount of that unit is compared with its recoverable amount. The recoverable amount of a CGU is equal to the higher of the fair value less costs to sell and its value in use. Value in use is calculated as the discounted value of the cash flow projections that the Bank estimates and is based on the latest budgets approved for the next five years. The principal hypotheses are a sustainable growth rate to extrapolate the cash flows indefinitely, and the discount rate used to discount the cash flows is equal to the weighted cost of capital assigned to each CGU. If the carrying amount of the CGU exceeds the related recoverable amount, the Bank recognizes an impairment loss; the resulting loss is apportioned by reducing, first, the carrying amount of the goodwill allocated to that CGU and, second, if there are still impairment losses remaining to be recognized, the carrying amount of the rest of the assets. This is done by allocating the remaining loss in proportion to the carrying amount of each of the assets in the unit. No impairment of goodwill attributable to the minority interests may be recognized. Impairment losses on goodwill are recognized under Impairment losses on other assets (net) - Goodwill and other intangible assets in the consolidated income statement. An impairment loss recognized for goodwill is not reversed in a subsequent period. ii. Other intangible assets Other intangible assets include the amount of identifiable intangible assets. Other intangible assets can have an indefinite useful life when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Bank - or a finite useful life, in all other cases. Intangible assets with indefinite useful lives are not amortized and are carried at cost less accumulated impairment losses. At the end of each reporting period or whenever there is any indication of impairment, the Bank reviews the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if this is not the case, to take the appropriate steps. Intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The intangible asset amortization charge is recognized under Depreciation and amortization in the consolidated income statement. Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in the consolidated income statement when the asset is derecognized. Impairment charges are included in Impairment losses on other assets (net) – Goodwill and other intangible assets in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years, are similar to those used for tangible assets (see Note 2.j). Internally-generated computer software Expenditure on research activities is recognized as an expense in the period in which it is incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Bank are recognized as intangible assets when the following criteria are met: | ● | it is technically feasible to complete the software so that it will be available for use, |
| ● | Bank’s Management intends to complete the software and use or sell it, |
| ● | there is an ability to use or sell the software, |
| ● | it can be demonstrated how the software will generate probable future economic benefits, |
| ● | adequate technical, financial and other resources to complete the development and to use or sell the software are available, and |
| ● | the expenditure attributable to the minority interests maysoftware during its development can be recognized.reliably measured. |
Directly attributable costs that are capitalized as part of the software include employee costs and an appropriate portion of relevant overheads. Capitalized development costs are recognized as intangible assets and amortized from the point at which the asset is ready for use. Where no internally-generated computer software can be recognized, development expenditure is recognized in the consolidated income statement in the period in which it is incurred and cannot be subsequently capitalized. Subsequent to initial recognition, internally-generated computer software are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. m) Provisions and contingent assets and liabilities When preparing the consolidated financial statements, Bank’s Management distinguishes between: | Impairment losses on goodwill are recognized under Impairment losses on other assets (net) - Goodwill and other intangible assets in
| Provisions: credit balances covering present obligations at the consolidated income statement. An impairmentreporting date arising from past events, which could give rise to a loss recognized for goodwill is not reversed in a subsequent period.
ii. Other intangible assets
Other intangible assets include the amount of identifiable intangible assets (such as computer software).
Other intangible assets can have an indefinite useful life when, based on an analysis of all the relevant factors, it is concluded that there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Bank, - which is considered to be likely to occur and certain as to its nature but uncertain as to its amount and/or a finite useful life, in all other cases.timing.
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| Intangible assets with indefinite useful lives are-
| Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not amortized and are carried at cost less accumulated impairment losses. Atwholly within the endcontrol of each reporting period or whenever there is any indicationthe Bank. They include the present obligations of impairment, the Bank reviews the remaining useful lives of the assets in order to determine whether they continue to be indefinite and, if thiswhen it is not the case, to take the appropriate steps. Intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful lives are reviewed at the endprobable that an outflow of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The intangible asset
amortization charge is recognized under Depreciation and amortization in the consolidated income statement.
Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
An intangible asset is derecognized on disposal, or when no futureresources embodying economic benefits are expected from use or disposal. Gains or losses arising from derecognitionwill be required to settle them. The Bank does not recognize the contingent liability. The Bank will disclose a contingent liability, unless the possibility of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amountoutflow of the asset, are recognized in the consolidated income statement when the assetresources embodying economic benefits is derecognized.remote.
Impairment charges are included in Impairment losses on other assets (net) – Goodwill and other intangible assets in the consolidated income statement. The criteria used to recognize the impairment losses on these assets and, where applicable, the reversal of impairment losses recognized in prior years, are similar to those used for tangible assets (see Note 2.k).
Internally-generated computer software
Expenditure on research activities is recognized as an expense in the period in which it is incurred.
Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Bank are recognized as intangible assets when the following criteria are met:
| ● | it is technically feasible to complete the software so that it will be available for use, |
| ● | Bank’s Management intends to complete the software and use or sell it, |
| ● | there is an ability to use or sell the software, |
| ● | it can be demonstrated how the software will generate probable future economic benefits, |
| ● | adequate technical, financial and other resources to complete the development and to use or sell the software are available, and |
| ● | the expenditure attributable to the software during its development can be reliably measured. |
| Directly attributable costs that are capitalized as part of the software include employee costs and an appropriate portion of relevant overheads.
Capitalized development costs are recognized as intangible assets and amortized from the point at which the asset is ready for use.
Where no internally-generated computer software can be recognized, development expenditure is recognized in the consolidated income statement in the period in which it is incurred and cannot be subsequently capitalized.
Subsequent to initial recognition, internally-generated computer software are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.
n) Provisions and contingent assets and liabilities
When preparing the consolidated financial statements, Bank’s Management distinguishes between:
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| Provisions: credit balances covering present obligations at the reporting date arising from past events, which could give rise to a loss for the Bank.
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| Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future events not wholly within the control of the Bank. They include the present obligations of the Bank when it is not probable that an outflow of resources embodying economic benefits will be required to settle them. The Bank does not recognize the contingent liability. The Bank will disclose a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.
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| - | Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence or non-occurrence of events beyond the control of the Bank. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes to the consolidated financial statements, if it is probable that these assets will give rise to an increase in resources embodying economic benefits. |
Provisions
Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material).
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
The consolidated financial statements include all provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with IFRS, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes to the consolidated financial statements.
Provisions are reviewed and adjusted at the end of each year. Provisions are used alsostatements, if it is probable that these assets will give rise to cater for the specific obligations for which they were originally recognized. Provisions are reversed fully or partially when such obligations cease to exist or are reduced.
Provisions are classified according to the obligations covered as follows:
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| Provisions for pensions and similar obligations under scope of IAS 19: amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations (see note 2.t).an increase in resources embodying economic benefits.
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Provisions Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. The consolidated financial statements include all provisions with respect to which it is considered that it is more likely than not that the obligation will have to be settled. In accordance with IFRS, contingent liabilities must not be recognized in the consolidated financial statements, but must rather be disclosed in the notes to the consolidated financial statements. Provisions are reviewed and adjusted at the end of each year. Provisions are used also to cater for the specific obligations for which they were originally recognized. Provisions are reversed fully or partially when such obligations cease to exist or are reduced. Provisions are classified according to the obligations covered as follows: | - | Provisions for pensions and similar obligations under scope of IAS 19: amount of all the provisions made to cover post-employment benefits, including obligations to pre-retirees and similar obligations (see note 2.s). |
| - | Provisions for tax not included in the scope of IAS 12 and legal matters: amount of the provisions recognized to cover tax and legal obligations. |
| F-97-
| TableProvisions for off-balance sheet risk: amount of Contentsthe provisions made to cover obligations arising as the result of those transactions in which the Bank guarantees the obligations of a third party arising as a result of financial guarantees granted or other contracts and unfunded lending commitments such as letters of credit, financial guarantees and available lines of credit cards and non-revolving consumer loans, which are irrevocable commitments that may give rise to the recognition of financial assets.
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| Provisions for off-balance sheet risk: amount of the provisions made to cover obligations arising as the result of those transactions in which the Bank guarantees the obligations of a third party arising as a result of financial guarantees granted or other contracts and unfunded lending commitments such as letters of credit, financial guarantees and available lines of credit cards and non-revolving consumer loans, which are irrevocable commitments that may give rise to the recognition of financial assets.
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| - | Other provisions: include the amount of other provisions recognized by the Bank (see Note 24). |
o) Court proceedings and/or claims in process
At the end of 2019 and 2020, certain court proceedings and claims were in process against the Bank arising from the ordinary course of their operations (see Note 24).
p) Share-based payments
For share-based payment transactions, the goods or services received are measured as an equity-settled share-based payment transaction when the awards granted are the Bank’s own equity instruments. In all other circumstances, the goods or services received by the Bank are measured as a cash-settled share-based payment transaction.
Equity-settled shared-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled shared-based payments is expensed on a straight-line basis over the vesting period, based on the Bank’s estimate of equity instruments that will
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n) Court proceedings and/or claims in process At the end of 2021 and 2022, certain court proceedings and claims were in process against the Bank arising from the ordinary course of their operations (see Note 24). o) Share-based payments Equity-settled shared-based payments to employees and others providing similar services were measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled shared-based payments was expensed on a straight-line basis over the vesting period, based on the Bank’s estimate of equity instruments that would eventually vest, with a corresponding increase in consolidated total equity. At the end of each reporting period, the Bank revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in the consolidated income statement such that the cumulative expense reflects the revised estimate. Cash-settled share-based payments to employees, the services acquired and the liability incurred are measured at the fair value of the liability. The fair value determined at the grant date of the cash-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Bank’s estimate of equity instruments that will eventually vest, with a corresponding increase in the liability. At the end of each reporting period, the Bank revises its estimate of the number of equity instruments expected to vest. Until the liability is settled, the fair value of the liability is remeasured at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in the consolidated income statement for the year. The services received and the liability to pay for those services are recognized as the employees render service. Share-based payments are discussed in Note 42.b, 42.c, 42.d and 43.b. p) Recognition of income and expense The most significant criteria used by the Bank to recognize its income and expenses are summarized as follows: i. Interest income and interest expense Interest income and interest expense are generally recognized on an accrual basis using the effective interest method. ii. Dividends Dividends received from equity instruments are recognized as income when the Bank’s right to receive them arises. iii. Fee and commission income and expense Fee and commission income and expense are recognized using criteria that vary according to their nature. The main criteria are as follows: | - | Fee and commission income and expense relating to financial assets and financial liabilities measured at FVTPL are recognized when received or paid. |
| - | Those arising from transactions or services that are performed over a period are recognized over the life of these transactions or services. |
| - | Those relating to services provided in a single act are recognized when the single act is carried out. |
iv. Non-finance income and expense Non-finance income and expense are recognized when the good is delivered or the non-financial service is rendered. To determine the amount and timing of recognition, IFRS 15 Revenue from Contracts with Customers five-step model is followed: identification of the contract with the customer, identification of the separate obligations of the contract, determination of the transaction price, distribution of the transaction price among the identified obligations and finally recording of income as the obligations are satisfied. v. Deferred collections and payments Deferred collections and payments are recognized at the amount resulting from discounting the expected cash flows at market rates. vi. Loan arrangement fees Loan arrangement fees that are an integral part of the effective interest rate of a financial instrument, mainly loan origination fees, are accrued and recognized over the term of the loan as a part of the effective interest method. q) Financial guarantees Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives. When the Bank purchases a financial guarantee contract in respect of a financial asset and pays the cost of the guarantee, at inception of the guarantee considers the following: | - | If the financial guarantee is an integral part of the guaranteed financial asset, it is treated as an adjustment to the effective interest rate of the guaranteed financial asset as a transaction cost, unless the financial asset is measured at FVTPL, and include the expected cash flows from the financial guarantee when measuring the expected credit losses of the guaranteed financial asset. |
| - | If the financial guarantee is not an integral part of the guaranteed financial asset, the cost is recognized as a separate pre-payment asset, and it is amortized over the shorter of the life of the guarantee and the expected life of the guaranteed financial asset. The pre-payment asset is tested for impairment under IAS 36. The expected cash flows from the financial guarantee are not included in the measurement of the expected credit losses of the guaranteed financial asset and a separate reimbursement asset is recognized in the consolidated balance sheet in accordance with IAS 37. |
When the Bank provides financial guarantees, these are initially recognized on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissions and interest receivable from these contracts over the term thereof. Financial guarantee contracts issued by the Bank and, if not designated at FVTPL, are subsequently measured at the higher of: | ● | the amount of the obligation under the contract, as determined in accordance with the IFRS 9 expected credit loss model; and |
| ● | the amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies. |
Financial guarantees provided by the Bank, regardless of the guarantor, instrumentation or other circumstances are reviewed periodically to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provision is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on financial assets carried at amortized cost (described in Note 2.g above). The provisions made for these transactions are recognized under Provisions – Other provisions in the consolidated balance sheet. These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement. If a specific provision is required for financial guarantees, the related unearned commissions recognized under Financial liabilities at amortized cost in the consolidated balance sheet are reclassified to the appropriate provision. r) Loan commitments Loan commitments granted by the Bank are subject to the impairment requirements of IFRS 9 and are accounted for as off-balance sheet risk in memorandum accounts. The provisions made for these transactions are recognized under Provisions for off-balance sheet risk in the consolidated balance sheet (see Note 24). These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement. s) Post-employment benefits The Bank’s post-employment obligations to its employees are deemed to be defined contribution plans when the Bank makes pre-determined contributions to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified as defined benefit plans (see Note 24.c). Defined contribution plans Payments made in each year related to defined contribution plans are recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized under Provisions – Provision for pensions and similar obligations on the liability side of the consolidated balance sheet. Defined benefit plans The Bank recognizes under Provisions – Provision for pensions and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets. The cost of providing retirement benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at the end of each annual reporting period. Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions: | - | They are not owned by the Bank, but by a legally separate entity that is not a party related to the Bank. |
| - | They are only available to pay or fund post-employment benefits and they cannot be returned to the Bank unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the Bank to current and former employees, or they are returned to reimburse employee benefits already paid by the Bank. |
Post-employment benefits are recognized as follows: | - | Service cost is recognized in the consolidated income statement such thatand includes the cumulative expense reflects the revised estimate, with a corresponding adjustment to Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.following items: |
| For cash-settled share-based payments to employees and others providing similar services, the services acquired and the liability incurred are measured at the fair value of the liability. The fair value determined at the grant date of the cash-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Bank’s estimate of equity instruments that will eventually vest, with a corresponding-
| Current service cost (the increase in liability. At the end of each reporting period, the Bank revises its estimate of the number of equity instruments expected to vest. Until the liability is settled, the fair value of the liability is remeasured at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in the consolidated income statement for the year. The services received and the liability to pay for those services are recognized as the employees render service. Share-based payments are discussed in Note 43.b, 42.b, 42.c and 42.d.
q) Recognition of income and expenses and similar charges
The most significant criteria used by the Bank to recognize its income and expenses are summarized as follows:
i. Interest income and interest expenses and similar charges
Interest income and interest expenses and similar charges are generally recognized on an accrual basis using the effective interest method.
ii. Dividends
Dividends received from equity instruments are recognized as income when the Bank’s right to receive them arises.
iii. Fee and commission income and expenses
Fee and commission income and expenses are recognized using criteria that vary according to their nature. The main criteria are as follows:
| - | Fee and commission income and expenses relating to financial assets and financial liabilities measured at FVTPL are recognized when received or paid. |
| - | Those arising from transactions or services that are performed over a period are recognized over the life of these transactions or services. |
| - | Those relating to services provided in a single act are recognized when the single act is carried out. |
iv. Non-finance income and expenses
Non-finance income and expenses are recognized when the good is delivered or the non-financial service is rendered. To determine the amount and timing of recognition, IFRS 15 Revenue from Contracts with Customers five-step model is followed: identification of the contract with the customer, identification of the separate obligations of the contract, determination of the transaction price, distribution of the transaction price among the identified obligations and finally recording of income as the obligations are satisfied.
v. Deferred collections and payments
Deferred collections and payments are recognized at the amount resulting from discounting the expected cash flows at market rates.
vi. Loan arrangement fees
Loan arrangement fees that are an integral part of the effective interest rate of a financial instrument, mainly loan origination fees, are accrued and recognized over the term of the loan as a part of the effective interest method.
r) Financial guarantees
Financial guarantees are defined as contracts whereby an entity undertakes to make specific payments on behalf of a third party if the latter fails to do so, irrespective of the various legal forms they may have, such as guarantees, insurance policies or credit derivatives.
When the Bank purchases a financial guarantee contract in respect of a financial asset and pays the cost of the guarantee, at inception of the guarantee considers the following:
| - | If the financial guarantee is an integral part of the guaranteed financial asset, it is treated as an adjustment to the effective interest rate of the guaranteed financial asset as a transaction cost, unless the financial asset is measured at FVTPL, and include the expected cash flows from the financial guarantee when measuring the expected credit losses of the guaranteed financial asset. |
| - | If the financial guarantee is not an integral part of the guaranteed financial asset, the cost is recognized as a separate pre-payment asset, and it is amortized over the shorter of the life of the guarantee and the expected life of the guaranteed financial asset. The pre-payment asset is tested for impairment under IAS 36. The expected cash flows from the financial guarantee are not included in the measurement of the expected credit losses of the guaranteed financial asset and a separate reimbursement asset is recognized in the consolidated balance sheet in accordance with IAS 37. |
When the Bank provides financial guarantees, these are initially recognized on the liability side of the consolidated balance sheet at fair value, which is generally the present value of the fees, commissionsobligations resulting from employee service in the current period) is recognized under Personnel expenses.
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| - | The past service cost, which arises from changes to existing post-employment benefits or from the introduction of new benefits and interest receivable from these contracts overincludes the term thereof. Financial guarantee contracts issued by the Bank and, if not designated at FVTPL, are subsequently measured at the higher of:
| ● | the amount of the obligation under the contract, as determined in accordance with the IFRS 9 expected credit loss model; and |
| ● | the amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies. |
Financial guarantees provided by the Bank, regardlesscost of the guarantor, instrumentation or other circumstances are reviewed periodically to determine the credit risk to which they are exposed and, if appropriate, to consider whether a provisionreductions, is required. The credit risk is determined by application of criteria similar to those established for quantifying impairment losses on financial assets carried at amortized cost (described in Note 2.g above).
The provisions made for these transactions are recognized under Provisions – Other provisions in the consolidated balance sheet. These provisions are recognized and reversed with a charge(net).
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| - | Any gain or credit, respectively, to Provisions (net) in the consolidated income statement. If a specific provisionloss arising from plan settlements is required for financial guarantees, the related unearned commissions recognized under Financial liabilities at amortized cost – Other financial liabilities in the consolidated balance sheet are reclassified to the appropriate provision.
s) Loan commitments
Loan commitments granted by the Bank are subject to the impairment requirements of IFRS 9 and are accounted for as off-balance sheet risk in memorandum accounts.
The provisions made for these transactions are recognized under Provisions for off-balance sheet risk(net).
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| - | Net interest on the net defined benefit liability (asset), i.e., the change during the period in the consolidated balance sheet (see Note 24). These provisions are recognized and reversed with a charge or credit, respectively, to Provisions (net) in the consolidated income statement. t) Post-employment benefits
The Bank’s post-employment obligations to its employees are deemed to be defined contribution plans when the Bank makes pre-determined contributions to a separate entity and will have no legal or effective obligation to make further contributions if the separate entity cannot pay the employee benefits relating to the service rendered in the current and prior periods. Post-employment obligations that do not meet the aforementioned conditions are classified asnet defined benefit plans (see Note 24.c).
Defined contribution plans
Payments made in each year related to defined contribution plans aretime, is recognized under Personnel expenses in the consolidated income statement. The amounts not yet contributed at each year-end are recognized under Provisions – Provision for pensionsInterest expense and similar obligations on the liability side of the consolidated balance sheet.
Defined benefit plans
The Bank recognizes under Provisions – Provision for pensionscharges (Other interest income and similar obligations on the liability side of the consolidated balance sheet (or under Other assets on the asset side, as appropriate) the present value of its defined benefit post-employment obligations, net of the fair value of the plan assets. The cost of providing retirement benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at the end of each annual reporting period.
Plan assets are defined as those that will be directly used to settle obligations and that meet the following conditions:
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| They are not owned by the Bank, but by a legally separate entity that is not a party related to the Bank.
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| They are only available to pay or fund post-employment benefits and they cannot be returned to the Bank unless the assets remaining in the plan are sufficient to meet all the benefit obligations of the plan and of the Bank to current and former employees, or they are returned to reimburse employee benefits already paid by the Bank.
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Post-employment benefits are recognized as follows:
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| Service cost is recognized in the consolidated income statement and includes the following items:
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| Current service cost (the increase in the present value of the obligations resulting from employee service in the current period) is recognized under Personnel expenses.
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| The past service cost, which arises from changes to existing post-employment benefits or from the introduction of new benefits and includes the cost of reductions, is recognized under Provisions (net).
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| Any gain or loss arising from plan settlements is recognized under Provisions (net).
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| Net interest on the net defined benefit liability (asset), i.e., the change during the period in the net defined benefit liability (asset) that arises from the passage of time, is recognized under Interest expense and similar charges (Interest income if it constitutes income) in the consolidated income statement.
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| The remeasurement of the net defined benefit obligation is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet and includes:
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| Actuarial gains and losses generated in the year, arising from the differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions.
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| - | The remeasurement of the net defined benefit obligation is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet and includes: |
| - | Actuarial gains and losses generated in the year, arising from the differences between the previous actuarial assumptions and what has actually occurred and from the effects of changes in actuarial assumptions. |
| - | The return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset). |
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| - | Any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset). |
| - | Remeasurements recognized in other comprehensive income are not reclassified to the consolidated income statement. |
Further details about post-employment benefits are given in Note 24.c.
u) Other long-term employee benefits
Other long-term employee benefits, defined as obligations to pre-retirees -taken to be those who have ceased to render services at the Bank but who, without being legally retired, continue to have economic rights vis-à-vis the Bank until they acquire the legal status of retiree-, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that actuarial gains and losses are recognized under Provisions (net) in the consolidated income statement.
v) Termination benefits
Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, if implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed.
w) Income tax
Income tax expense represents the sum of the income tax currently payable and deferred income tax.
Current income tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from Profit for the year as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred income tax
Deferred income tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, tax loss and tax credit carryforwards. Deferred income tax is accounted for using the liability method.
Deferred income tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized based on tax laws and rates that have been enacted or substantively enacted at the reporting date.
Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the Bank will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit. Other deferred tax assets (tax loss and tax credit carryforwards) are only recognized if it is considered probable that, the Bank will have sufficient future taxable profits against which they can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Income and expenses recognized directlyceiling, excluding amounts included in consolidated total equity are accounted for as temporary differences.
The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Tax assets includes the amount of all tax assets, which are broken down into current -amounts of tax to be recovered within the next twelve months- and deferred -amounts of tax to be recovered in future years, including those arising from tax loss or tax credit carryforwards.
Tax liabilities includes the amount of all tax liabilities (except provisions for taxes), which are broken down into current -the amount payable in respect of the income taxnet interest on the taxable profit for the year and other taxes in the next twelve months- and deferred -the amount of income tax payable in future years.net defined benefit liability (asset).
Current and deferred income tax for the year
The income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement.
Current and deferred income tax are recognized in the consolidated income statement, except when they relate to items that are
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| - | Remeasurements recognized in other comprehensive income or directly in consolidated total equity, in which case, the current and deferred income tax are also recognized in other comprehensive income or directly in consolidated total equity, respectively.Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.
x) Remaining maturity periods
The analysis of the maturities of the balances of certain items in the consolidated balance sheet at 2019 and 2020 year-end is provided in Note 45.
y) Segment reporting
Operating segments are reported in a manner consistent with the internal reporting providednot reclassified to the Chief Operating Decision Maker. The Chief Operating Decision Maker (CODM), who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the CEO.
z) Dividend distribution
Dividend distributions to the Bank’s shareholders are recognized as a liability in the consolidated financial statements in the period in which the dividends are proposed by the Board of Directors and approved by the Bank’s shareholders.
aa) Treasury shares
Own equity instruments that are reacquired (treasury shares) are recognized at cost and deducted from consolidated total equity. No gain or loss is recognized in the consolidated income statement on the
purchase, sale, issue or cancellation of the Bank’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
ab) Consolidated income statement and other comprehensive income
This consolidated statement presents the income and expensesstatement.
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Further details about post-employment benefits are given in Note 24.c. t) Other long-term employee benefits Other long-term employee benefits, defined as obligations to pre-retirees taken to be those who have ceased to render services at the Bank but who, without being legally retired, continue to have economic rights vis-à-vis the Bank until they acquire the legal status of retiree, are treated for accounting purposes, where applicable, as established above for defined benefit post-employment plans, except that actuarial gains and losses are recognized under Provisions (net) in the consolidated income statement. u) Termination benefits Termination benefits are recognized when there is a detailed formal plan identifying the basic changes to be made, if implementation of the plan has begun, its main features have been publicly announced or objective facts concerning its implementation have been disclosed. v) Income tax Income tax expense represents the sum of the income tax currently payable and deferred income tax. Current income tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from Profit for the year as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred income tax Deferred income tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, tax loss and tax credit carryforwards. Deferred income tax is accounted for using the liability method. Deferred income tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized based on tax laws and rates that have been enacted or substantively enacted at the reporting date and reflects uncertainty related to income taxes, if there is any. Deferred tax assets are only recognized for temporary differences to the extent that it is considered probable that the Bank will have sufficient future taxable profits against which the deferred tax assets can be utilized, and the deferred tax assets do not arise from the initial recognition (except in a business combination) of other assets and liabilities in a transaction that affects neither taxable profit nor accounting profit. Other deferred tax assets (tax loss and tax credit carryforwards) are only recognized if it is considered probable that, the Bank will have sufficient future taxable profits against which they can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Income and expense recognized directly in consolidated total equity are accounted for as temporary differences. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Tax assets include the amount of all tax assets, which are broken down into current amounts of tax to be recovered within the next twelve months and deferred amounts of tax to be recovered in future years, including those arising from tax loss or tax credit carryforwards. Tax liabilities include the amount of all tax liabilities (except provisions for taxes), which are broken down into current the amount payable in respect of the income tax on the taxable profit for the year and other taxes in the next twelve months and deferred the amount of income tax payable in future years. Current and deferred income tax for the year The income tax expense is calculated as the sum of the current tax resulting from application of the appropriate tax rate to the taxable profit for the year (net of any deductions allowable for tax purposes), and of the changes in deferred tax assets and liabilities recognized in the consolidated income statement. Current and deferred income tax are recognized in the consolidated income statement, except when they relate to items that are recognized in other comprehensive income or directly in consolidated total equity, in which case, the current and deferred income tax are also recognized in other comprehensive income or directly in consolidated total equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. w) Remaining maturity periods The analysis of the maturities of the balances of certain items in the consolidated balance sheet at 2021 and 2022 year-end is provided in Note 45. x) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker (CODM), who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the CEO. y) Dividend distribution Dividend distributions to the Bank’s shareholders are recognized as a liability in the consolidated financial statements in the period in which the dividends are proposed by the Board of Directors and approved by the Bank’s shareholders. z) Treasury shares Own equity instruments that are reacquired (treasury shares) are recognized at cost and deducted from consolidated total equity. No gain or loss is recognized in the consolidated income statement on the purchase, sale, issue or cancellation of the Bank’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognized in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. aa) Consolidated income statement and other comprehensive income This consolidated statement presents the income and expense generated by the Bank as a result of its business activity in the year, and a distinction is made between the income and expenses recognized in the consolidated income statement for the year and the other income and expenses recognized directly in consolidated total equity. Accordingly, this consolidated statement presents: | b. | The net amount of the income and expenses recognized directly in consolidated total equity that will not be reclassified subsequently to the consolidated income statement. |
| c. | The net amount of the income and expenses recognized directly in consolidated total equity that may be reclassified subsequently to the consolidated income statement when certain conditions are met. |
| d. | The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associated entities or jointly controlled entities accounted for using the equity method, which are presented net. |
| e. | Total consolidated comprehensive income, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to non-controlling interests. |
This consolidated statement presents the items separately by nature, grouping together items that, in accordance with the applicable IFRS, will not be reclassified subsequently to the consolidated income statement.
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| c. | The net amount of the income and expenses recognized directly in consolidated total equity that may be reclassified subsequently to the consolidated income statement since the requirements established by the corresponding IFRSwhen certain conditions are met.ac)
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| d. | The income tax incurred in respect of the items indicated in b) and c) above, except for the valuation adjustments arising from investments in associated entities accounted for using the equity method, which are presented net. |
| e. | Total consolidated comprehensive income, calculated as the sum of a) to d) above, presenting separately the amount attributable to the Parent and the amount relating to non-controlling interests. |
This consolidated statement presents the items separately by nature, grouping together items that, in accordance with the applicable IFRS, will not be reclassified subsequently to the consolidated income statement since the requirements established by the corresponding IFRS are met. ab) Consolidated statement of changes in total equity This consolidated statement presents all the changes in consolidated total equity, including the adjustments in the opening balance on Accumulated reserves arising from changes in accounting policies and from the correction of errors. Accordingly, this consolidated statement presents a reconciliation of the carrying amount at the beginning and end of the year of all the consolidated total equity items and the changes are grouped together based on their nature into the following items: | a. | Adjustments in the opening balance on Accumulated reserves due to changes in accounting policies and from the correction of errors.Accordingly, this consolidated statement presents a reconciliation of the carrying amount at the beginning and end of the year of all theerrors: include those in consolidated total equity arising as a result of the
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| | retrospective restatement of the balances in the consolidated financial statements, distinguishing between those resulting from changes in accounting policies and those relating to the correction of errors. |
| b. | Income and expense recognized in the year: includes, in aggregate form, the total of the aforementioned items recognized in the consolidated income statement. |
| c. | Other changes in consolidated total equity: include the remaining items recognized in consolidated total equity, including, inter alia, increases and decreases in share capital, distribution of profit, transactions involving own equity instruments (treasury shares), transfers between equity items and the changes are grouped together based on their nature into the following items: | a. | Adjustments in the opening balance on Accumulated reserves due to changes in accounting policies and from the correction of errors: include those in consolidated total equity arising as a result of the retrospective restatement of the balances in the consolidated financial statements, distinguishing between those resulting from changes in accounting policies and those relating to the correction of errors.any other increases or decreases in consolidated total equity. |
| b. | Income and expense recognized in the year: includes, in aggregate form, the total of the aforementioned items recognized in the consolidated income statement. |
| c. | Other changes in consolidated total equity: include the remaining items recognized in consolidated total equity, including, inter alia, increases and decreases in share capital, distribution of profit, transactions |
| | involving own equity instruments (treasury shares), transfers between equity items and any other increases or decreases in consolidated total equity. |
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ac) Consolidated statement of cash flows The following terms are used in the consolidated statement of cash flows with the meanings specified: | ● | Cash flows: inflows and outflows of cash and cash equivalents, which are short-term, highly liquid investments that are subject to an insignificant risk of changes in value, irrespective of the portfolio in which they are classified. |
The Bank classifies as cash and cash equivalents the balances recognized under Cash and balances with the Central Bank in the consolidated balance sheet. | ● | Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities. |
| ● | Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. |
| ● | Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities. |
3. Significant events The following is a summary of the significant corporate transactions undertaken by the Bank and other significant events over the last three years: a) Corporate events Acquisition of Elavon Mexico Holding Company On March 13, 2020, the Bank acquired 49% of the shares representing the capital stock of Santander Merchant Platform Solutions México, S.A. de C.V. (formerly, Elavon Mexico Holding Company, S.A. de C.V.). Santander Merchant Platform Solutions, S.L., a subsidiary of Banco Santander (Spain) acquired the remaining 51% of the capital stock. The agreed purchase price for the total equity stock is 1,680 million pesos. As of December 31, 2021 and also for 6 months during 2022, the Bank measured this investment using the equity method (see Note 49). As of December 31, 2022, the Bank reclassified this investment as a non-current asset held for sale (see Note 13). Senior Unsecured Notes On April 14, 2020, the Bank issued Senior Unsecured Notes for USD 1,750 million at an annual interest rate of 5.375% and maturity in 2025. The Senior Unsecured Notes were offered in the United States of America through a private placement to qualified institutional buyers, in accordance with Rule 144A under the U.S. Securities Act of 1933 and, outside the United States of America, in accordance with Regulation S under the Securities Act. Merger of Santander Vivienda, S.A. de C.V. On October 28, 2019, Banco Santander México obtained the authorization from Banco Santander (Spain) to carry out a merger through absorption between Santander Vivienda, S.A. de C.V. (Santander Vivienda), with the former being the surviving entity, and the latter being the merged entity. On August 28, 2020, the SHCP authorized the merger of Banco Santander México as the surviving merging entity with Banco Santander México and Santander Vivienda, as the merged entity, which is extinguished. During the Extraordinary General Meeting of September 30, 2020, it was approved to carry out the merger of Banco Santander México as the merging entity with Santander Vivienda as the merged entity. The total assets and total liabilities of Santander Vivienda merged by Banco Santander México amounted to 63,703 million pesos and 54,925 million pesos, respectively. Merchant business On December 3, 2020, Banco Santander México entered into an assignment agreement with SMPS Merchant Platform Solutions México, S.A. de C.V. (SMPS), subsidiary entity of Santander Merchant Platform Solutions México, S.A. de C.V., in order to sell all the acquisition contracts related to the merchant payment business operated and administered by Banco Santander México, along with their respective economic rights. The agreed sell price amounts to 1,600 million pesos. On June 1, 2021, as part of Banco Santander’s (Spain) strategy to consolidate the merchant payment business into a global business and, once the SMPS registration was obtained to be able to operate as a Participant in Disposal Networks (Participante en Redes de Medios de Disposición) in its capacity as Acquirer (Adquirente) in accordance with the General Provisions applicable to Disposal Networks (Disposiciones de Carácter general aplicables a las Redes de Medios de Disposición) issued by the CNBV and the Mexican Central Bank, Banco Santander México formalized the sale of all its merchant payment contracts (acquiring business) to SMPS. For this transaction, the Bank recognized a gain of 816 million pesos within Other operating income in the consolidated income statement. Merchant business is discussed in Note 49. 2021 - Exchange Offers On March 23, 2021, Banco Santander (Spain) announced its intention to repurchase the outstanding shares of Banco Santander México that it did not own (8.3%). On June 8, 2021, Banco Santander (Spain) announced a change in the expected structure, instead of a mandatory delisting tender offer, a voluntary tender offer. On November 3, 2021, Banco Santander, S.A. (Spain) announced an exchange offer for the outstanding shares of Banco Santander México at a price of 26.50 Mexican pesos for each share of the Bank and the equivalent in US dollars of 132.50 Mexican pesos for each outstanding American Deposit Share (ADS). Consequently, Banco Santander, S.A. (Spain) increased its participation in the Bank to 96.16% from 91.64%. As a result of the exchange offer detailed above, the share-based payment plan was modified, from an equity-settled transaction to a cash-settled transaction and as a consequence, 264 million pesos were reclassified from Accumulated reserves within Shareholders’ equity to Other liabilities in the consolidated balance sheet. | ● | Operating activities: the principal revenue-producing activities of credit institutions and other activities that are not investing or financing activities. |
| ● | Investing activities: the acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents. |
| ● | Financing activities: activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.Further details about share-based payment plan are given in Note 42.b, 42.c, 42.d and 43.b. Issue of perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes On September 15, 2021, Banco Santander México issued perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes (Subordinated Additional Tier I Capital Notes) for USD 700 million with no fixed maturity or fixed redemption date, at an annual variable interest rate, which will be recalculated every 5 years based on the yield of the Treasury Notes of the United States of North America (US Treasury Notes) with a term of 5 years that is in force at that time plus the spread defined in the placement supplement. Initially annual interest rate at the time of issuance was 4.625% The Subordinated Additional Tier I Capital Notes were placed through an exclusive private offering to Banco Santander (Spain). Issuance of unsecured notes at a fixed interest rate On November 30, 2021, Banco Santander México issued through a national primary public offering unsecured notes for 7 years for an amount of 6,500 million pesos at a fixed annual gross interest rate of 8.08% per year and interest payments every 182 days. Issuance of unsecured notes at a floating interest rate On November 30, 2021, Banco Santander México issued through a national primary public offering unsecured notes for 4 years for an amount of 3,500 million pesos at a floating annual gross interest equivalent to TIIE for a term of 28 days plus a surcharge of 0.05% and payment of interest every 28 days. The annual gross interest rate applicable to the first interest payment period corresponds to 5.28% Amortization of the outstanding balance of perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes issued in 2016 On December 8, 2021, Banco Santander México notified the holders of its decision to pay in full the outstanding balance for an amount 500 million USD corresponding to the Subordinated Additional Tier I Capital Notes, issued on December 29, 2016. This transaction was settled at par value on January 19, 2022. Issuance of unsecured notes at a fixed interest rate On April 4, 2022, Banco Santander México issued through a national primary public offering unsecured notes for 7 years for an amount of 2,790 million pesos at a fixed annual gross interest rate of 8.72% per year and interest payments every 182 days. Issuance of unsecured notes at a floating interest rate On April 4, 2022, Banco Santander México issued through a national primary public offering unsecured notes for 5 years for an amount of 7,100 million pesos at a floating annual gross interest equivalent to TIIE for a term of 28 days plus a surcharge of 0.07% and payment of interest every 28 days. Issuance of unsecured notes at a floating interest rate On July 14, 2022, Banco Santander México issued through a national primary public offering unsecured notes for 4 years for an amount of 5,000 million pesos at a floating annual gross interest equivalent to the average one-day funding TIIE plus a surcharge of 0.29% and payment of interest every 28 days. 2022 - Exchange Offers On October 21, 2022, Banco Santander (Spain) announced its intention to repurchase all of the Serie B shares and American Depositary Shares of Banco Santander México that are not already in its possession. The Bank expects that the exchange offers will be completed during 2023 and, subsequently, start the delisting of all of the Serie B shares from the Mexican Stock Exchange and of all of the American Depositary Shares from the New York Stock Exchange. b) Other significant events COVID-19 pandemic Support Program On March 26, 2020, the CNBV issued an official letter giving response to the proposal of the Association of Banks of Mexico (ABM by its Spanish acronym) for the implementation of various relief measures (Support Program) in order to support borrowers impacted by the COVID-19 pandemic and with the aim of guaranteeing the stability of the Financial System in Mexico. The Bank implemented in March 2020 the Support Program, which includes the partial or total deferral of principal and/or interest payments for up to four months, with the possibility of extending it to two additional months, with respect to the total amount due from borrowers, without any interest charge. The Support Program was applied to commercial loans, mortgage loans, and revolving and non-revolving consumer loans as well as for agricultural loans, as long as the loan was classified as performing according to Mexican Banking GAAP as of February 28, 2020. In the case of microcredits (microloans), the Support Program was only applied as long as the loan was classified as performing according to Mexican Banking GAAP as of March 31, 2020. Bank’s Management applied its professional judgment in analyzing if the contractual terms and conditions of the loans benefited by the Support Program change substantially with respect to the original granted loan, concluding that the modified contractual cash flows on the financial assets do not result in derecognition as established by IFRS 9. The Support Program was active during 2020 and 531,636 loans were registered. As of December 31, 2021 and 2022, there are no loans still participating in the Support Program. Credit restructuring measures On September 24, 2020, SHCP and CNBV issued an optional package of measures for credit restructuring. These relief measures encourage and allow banks and other financial intermediaries to restructure the loans of customers who request it. These measures consist in various options such as extension of terms, reduction of interest rates or eventual reductions and a term of up to five years (sixty months), depending on the customer and institution. Additionally, on November 9, 2020, the CNBV issued regulatory facilities for credit institutions that implement “Institutional Restructuring Programs”, in order to offer better credit conditions to their customers. The Bank decided not to apply the optional restructuring measures nor other “Institutional Restructuring Programs”. Labor reform On April 23, 2021, a decree (Decree) was published by the Federal Government to regulate labor subcontracting, when a natural or legal person provides its own workers for the benefit of another person. When the Decree entered into force, various laws were reformed, added and repealed in order to: | i.) | Prohibit the subcontracting of personnel for activities that are part of the corporate purpose and the main activity of the entity, and |
The application
| ii.) | Allow the subcontracting of IFRS 16 has an impactservices and specialized works that are not part of the corporate purpose or main activity of the entity, as long as certain requirements are met, such as the contractor is registered in the consolidated statement of cash flows ofpublic register with the Bank.Under IFRS 16, lessees must present:
| - | Short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability as part of operating activities; |
| - | Cash paid for the interest portion of a lease liability as either operating activities or financing activities, as permitted by IAS 7 Statement of Cash Flows. The Bank has opted to include interest paid as part of financing activities; and |
| - | Cash payments for the principal portion for a lease liability, as part of financing activities. |
Under IAS 17, all lease payments on operating leases were presented as part of cash flows from operating activities.
3. Significant events
The following is a summary of the significant corporate transactions undertaken by the Bank and other significant events over the last three years:
a) Corporate events
Sale of Custody business
On July 24, 2015, Banco Santander (Spain) made an offer to the Bank to purchase their Custody business. The Bank accepted this offer. The agreed sale price on that date was 1,191 million pesos. This offer required the Bank to transfer their Custody business; however, this obligation was subject to the following conditions: i) was valid until June 30, 2016, ii) was subject to the same conditions established in a global agreement signed by Banco Santander (Spain) consisted of the sale of the custody businesses in Spain,
Mexico and Brazil, iii) authorizations must have been obtained from the Mexican authorities to establish a special purpose entity whose objective was the operation of the custody business in Mexico, iv) was dependent on the global transaction, if it was terminated, the transaction would also terminate in Mexico, and v) the transaction should have been formalized through the signing of the respective contracts.
On August 22, 2016, Mexican authorities authorized Banco Santander (Spain) to establish and operate a new bank in Mexico named Banco S3 México, S.A., Institución de Banca Múltiple (Banco S3). The activities of Banco S3 would be focused on the specialized business of deposits, custody and management of securities and cash in Mexico. On February 2, 2018, the Mexican Ministry of FinanceLabor and Public Credit (Secretaría de Hacienda y Crédito Público, hereinafter “SHCP”Social Security (STPS by its Spanish acronym) and the CNBV authorized Banco S3 to operate as a financial institution in Mexico.
On January 2, 2018, the Bank, as seller, and Banco S3, as buyer, entered into a purchase-sale agreement of the Custody business of the Bank. The agreed sale price was 850 million pesos, of, which 90% of the total amount was paid on February 9, 2018 and the remaining 10% would be paid one year after January 2, 2018. It was agreed by both parties, that the remaining 10% of the sale price could be adjusted contingent on the successful transfer of customers from the Bank to Banco S3. Later during October 2018, the agreed sale price was adjusted by 128 million pesos due to the low transfer rate of customers from the Bank to Banco S3 being the final sale price agreed of 722 million pesos.
This transaction was considered executed between entities under common control, therefore the effect from the sale of the Custody business was an increase of 506 million pesos in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
Acquisition of Isban México, S.A. de C.V.
On October 26, 2017, the Board of Directors approved the acquisition of Isban México, S.A. de C.V. (ISBAN) with the objective of creating a new technology-operating model for the Bank.
The CNBV authorized on September 14, 2018, the acquisition by the Bank of all the shares representing the capital stock of ISBAN.
On October 11, 2018, the Bank acquired from Banco Santander, S.A. (Spain) for 1,077 million pesos, all the shares representing the capital stock of ISBAN. This acquisition originated a charge of 225 million pesos in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet given that this transaction was considered executed by entities under common control.
On October 15, 2018, the Board of Directors of ISBAN approved the change of its corporate name from ISBAN to Santander Tecnología México, S.A. de C.V. (Santander Tecnología México).is renewed every three years.
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In compliance with the Decree, Banco Santander México hired 4,891 employees who provided non-specialized services who previously worked in its subsidiaries and 1,044 of its employees were transferred to some of its subsidiaries. 4. Distribution of the Bank’s profit and Earnings per share 4.1 Distribution of the Bank’s profit The distributions of the Bank’s profit ended December 31, 2020, 2021 and 2022 approved by the Board of Directors during the annual general meetings are as follows: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Profit of the year | | | 18,974 | | | 20,801 | | | 24,108 | Dividends declared | | | — | | | 4,921 | | | 17,878 | Dividend per share (pesos) | | | — | | | 0.73 | | | 2.64 | Dates of payment | | | | | | 06/18/2021 and | | | 06/28/2022 and | | | | | | | 11/05/2021 | | | 07/28/2022 |
During 2020, in order to strengthen banking institutions so they could be in a better position to absorb potentials losses that could arise because of the COVID-19 pandemic and have more resources to support the economic slowdown, the CNBV issued two recommendations, to avoid: a)The payment of dividends to shareholders, and b)Carry out share buybacks or any other mechanism aimed at rewarding shareholders. Considering the effects of the COVID-19 pandemic and on the recommendation received from the CNBV, the Bank decided not to pay dividends or carry out share buybacks in 2020.
4.2 Earnings per share According to IAS 33 Earnings per share, the Bank should present and adjust retrospectively, the basic and diluted earnings per share, if the number of ordinary or potential shares outstanding increases as a result of a capitalization, bonus issue or share split, or decreases as a result of a reverse share split. i. Basic earnings per share Basic earnings per share are calculated by dividing the profit attributable to the Parent by the weighted average number of shares outstanding during the year, excluding the average number of treasury shares, if any, held in the year (see Note 29.d). Accordingly, basic earnings per share were determined as follows: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Profit attributable to the Parent | | | 18,974 | | | 20,801 | | | 24,108 | Profit attributable to the Parent (net of non-controlling interest) | | | 18,974 | | | 20,801 | | | 24,108 | Weighted average number of shares outstanding | | | 6,776,640,349 | | | 6,775,682,106 | | | 6,781,322,904 | Basic earnings per share (pesos) | | | 2.80 | | | 3.07 | | | 3.56 |
ii. Diluted earnings per share In calculating diluted earnings per share, the amount of profit attributable to the Parent and the weighted average number of shares issued, excluding the average number of treasury shares, are adjusted to consider all the dilutive effects inherent to potential shares (see Note 29.d). Accordingly, diluted earnings per share were determined as follows: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Profit attributable to the Parent | | | 18,974 | | | 20,801 | | | 24,108 | Profit attributable to the Parent (net of non-controlling interest) | | | 18,974 | | | 20,801 | | | 24,108 | Weighted average number of shares outstanding | | | 6,776,640,349 | | | 6,775,682,106 | | | 6,781,322,904 | Dilutive effect of rights on shares | | | 10,354,008 | | | 11,312,251 | | | 5,671,453 | Adjusted number of shares | | | 6,786,994,357 | | | 6,786,994,357 | | | 6,786,994,357 | Diluted earnings per share (pesos) | | | 2.80 | | | 3.06 | | | 3.55 |
5. Remuneration and other benefit paid to the Bank’s directors, executive officers and other key management personnel The Bank considers as key management personnel the directors, the executive officers and the members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee and the remuneration committee. During 2021, the Deputy General Director of Global Corporate Banking, the Deputy Director of Retail Commercial Banking and the Deputy Director of Operations decided to step down. During 2022, a new CEO for Banco Santander México was named, two Vice-presidencies of Finance and Retail & Large Companies Banking were created and named, regarding these changes and some company leavers new Heads for Digital and Innovation, Corporate and Investment Banking, Human Resources, Chief Financial Officer, Chief Audit Executive, Corporate Resources and Recovery were named. The Heads of Retail Commercial Banking and Financial Inclusion were included to the Executive Committee.Other than the aforementioned personnel change, there were no significant changes in the Bank’s main key personnel from December 31, 2022 to the date on which these consolidated financial statements were authorized for issue. a) Remuneration of directors Our shareholders establish the compensation of our directors at the annual shareholders’ meeting. Accordingly, only independent directors receive compensation for their duties. Under Mexican law, we are not required to disclose on an individual basis the compensation of our directors, our executive officers and the members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee and the remuneration committee and we do not otherwise publicly disclose such information. The aggregate compensation paid to independent directors who were members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee, the remuneration committee and the Board of Directors of the Bank amounted to 23 million pesos during 2020, 30 million pesos during 2021 and 37 million pesos during 2022, paid as attendance fees. b) Remuneration of executive officers The aggregate amount for compensation and benefits to executive officers amounted to 431 million pesos during 2020, 453 million pesos during 2021 and 504 million pesos during 2022. The main benefits paid to the Bank’s executive officers are: salary, Christmas bonus, vacation bonus, holidays, performance bonus and share-based payments. The criteria for granting and paying bonus compensation vary according to the activities performed by the different areas and, therefore, payment of the bonus may vary depending on the department and activities performed by each member. c) Post-employment and other long-term benefits Our executive officers may participate in the same pension and medical expenses plan that is available to the Bank’s employees, but at different contribution percentages to the ones made by the rest of the employees. The total post-employment benefits (including pension plan, medical expenses and life insurance policies) to executive officers amounted to 522 million pesos as of December 31, 2020, 537 million pesos as of December 31, 2021 and 572 million pesos as of December 31, 2022. d) Loans to executive officers The loans granted to executive officers amount to 183 million pesos and 197 million pesos as of December 31, 2021 and 2022, respectively. 6. Cash and balances with the Central Bank The breakdown by type of balances of Cash and balances with the Central Bank is as follows: | | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Cash | | | 26,361 | | | 35,143 | Central Bank compulsory deposits | | | 23,978 | | | 23,978 | Deposits in the Central Bank | | | 12,705 | | | 13,623 | Accrued interest | | | 29 | | | 71 | | | | 63,073 | | | 72,815 |
Central Bank compulsory deposits relate to a minimum balance financial institutions are required to maintain with the Central Bank based on a percentage of deposits received from third parties. As of December 31, 2022 and 2021, the Bank maintained a special deposit in the Central Bank for an amount of 7,700 million pesos based on Circular 9/2020 issued by the Mexican Central Bank on June 13, 2020. Circular 9/2020 allows credit institutions that have Bonos de Regulación Monetaria Reportables (BREMS R) to use these financial instruments to guarantee overdrafts in their account in order to promote the healthy development of the Mexican financial system. Note 45.a includes a breakdown of the remaining maturity of Cash and balances with the Central Bank. The compulsory deposits required by the Central Bank have an indefinite term. Additionally, Note 45.d includes the fair value amounts of these assets. 7. Loans and advances to credit institutions The breakdown by classification, type and currency of the balances of Loans and advances to credit institutions in the consolidated balance sheets is as follows: | | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Classification: | | | | | | | Financial assets at fair value through profit or loss | | | 58,486 | | | 102,652 | Financial assets at amortized cost | | | 36,492 | | | 40,400 | | | | 94,978 | | | 143,052 | Type: | | | | | | | Reciprocal accounts | | | 17,820 | | | 17,583 | Guarantee deposits - Collateral delivered for OTC financial derivatives transactions (Note 32) | | | 13,234 | | | 14,585 | Reverse repurchase agreements | | | 58,486 | | | 102,652 | Other accounts | | | 5,438 | | | 8,232 | | | | 94,978 | | | 143,052 | Currency: | | | | | | | Peso | | | 83,382 | | | 103,094 | USD | | | 11,579 | | | 39,759 | Other currencies | | | 17 | | | 199 | | | | 94,978 | | | 143,052 |
As of December 31, 2021 and 2022, 13,234 million pesos and 14,585 million pesos, respectively, of loans and advances to credit institutions, have been pledged in connection with OTC financial derivatives The carrying amount of the assets acquired and liabilities assumed at the date of the acquisition were as follows:
| | | | |
|
|
| Carrying amount
|
|
|
|
|
|
| Assets:
|
|
|
|
| Cash
|
|
| 715
|
| Tangible assets
|
|
| 457
|
| Other assets
|
|
| 318
|
|
|
|
| 1,490
|
| Liabilities:
|
|
|
|
| Other liabilities
|
|
| (638)
|
|
|
|
|
|
| Net assets acquired
|
|
| 852
|
| Acquisition cost
|
|
| (1,077)
|
| Effect on acquisition
|
|
| (225)
|
|
|
|
|
|
|
Early settlement of Tier II Subordinated Capital Notes - Expiration of cash tender offer
On September 26, 2018, the Bank completed a cash tender offer (Tender Offer) for any and all of its outstanding 5.95% Tier II Subordinated Capital Notes issued on December 27, 2013 with a ten-year maturity (January 30, 2024). The amount effectively tendered was USD 1,222,907,000, which represented 94.07% of such 5.95% Tier II Subordinated Capital Notes. On January 30, 2019, the Bank exercised its call option and amortized the remaining USD 77,093,000.
Issue of Tier II Subordinated Capital Notes due 2028
On October 1, 2018, the Bank issued 5.95% Tier II Subordinated Capital Notes due 2028 for a total of USD 1,300 million, meeting the capital requirements under Basel III criteria for complementary capital/Tier II. Banco Santander (Spain) purchased USD 975 million, or 75%, of these Tier II Subordinated Capital Notes.
The Tier II Subordinated Capital Notes due 2028 were offered in the United States of America through a private placement to qualified institutional buyers, in accordance with Rule 144A under the U.S. Securities Act of 1933, as amended (Securities Act), and outside the United States of America, in accordance with Regulation S under the Securities Act.
Change of corporate name
On October 10, 2018, a modification in the Bank’s corporate name was duly approved such that, from that date, the Bank is named Banco Santander México, S.A., Institución de Banca Múltiple, Grupo Financiero Santander México. The modification consisted of eliminating the parentheses that were around the word “México”.
Exchange Offers
On August 18, 2019, Banco Santander (Spain) announced the commencement of its exchange offers to acquire all the issued and outstanding Series B shares and American Depositary Shares (ADS) of Banco Santander México in exchange for 0.337 of Banco Santander (Spain)’s ordinary share for each Banco Santander México´s Series B share and 1.685 Banco Santander (Spain)’s ADS for each Banco Santander México’s ADS.
The exchange offers comprised a United States exchange offer and a concurrent Mexican exchange offer.
The United States exchange offer was made pursuant to an offer to exchange/prospectus filed with the United States Securities and Exchange Commission on August 8, 2019, and was open to all United States holders of Banco Santander México´s Series B shares and all holders of Banco Santander México’s ADS, wherever located. The Mexican exchange offer was made pursuant to a Mexican information statement and placement prospectus and was open to holders of Banco Santander México´s Series B shares.
On September 6, 2019, Banco Santander (Spain) informed the expiration of the acceptance period of the exchange offers made for all the issued and outstanding Series B shares and ADS of Banco Santander México.
Acquisition of Elavon Mexico Holding Company
On March 13, 2020, the Bank acquired 49% of the shares representing the capital stock of Santander Merchant Platform Solutions México, S.A. de C.V. (formerly, Elavon Mexico Holding Company, S.A. de C.V.). Santander Merchant Platform Solutions, S.L., a subsidiary of Banco Santander (Spain) acquired the remaining 51% of the capital stock. The agreed purchase price for the total equity stock is 1,680 million pesos.
As of December 31, 2020, the Bank measures the investments in associated entities using the equity method (see Note 49).
Senior Unsecured Notes
On April 14, 2020, the Bank issued Senior Unsecured Notes for USD 1,750 million at an annual interest rate of 5.375% and maturity in 2025. The Senior Unsecured Notes were offered in the United States of America through a private placement to qualified institutional buyers, in accordance with Rule 144A under the U.S. Securities Act of 1933 and outside the United States of America, in accordance with Regulation S under the Securities Act.
Merger of Santander Vivienda, S.A. de C.V.
On October 28, 2019, Banco Santander México obtained the authorization from Banco Santander (Spain) to carry out a merger through absorption between Santander Vivienda, S.A. de C.V. (Santander Vivienda), with the former being the surviving entity, and the latter being the merged entity.
On August 28, 2020, SHCP authorized the merger of Banco Santander México as the surviving merging entity with Banco Santander México and Santander Vivienda, as the merged entity, which is extinguished.
During the Extraordinary General Meeting of September 30, 2020, it was approved to carry out the merger of Banco Santander México as the merging entity with Santander Vivienda as the merged entity.
The total assets and total liabilities of Santander Vivienda merged by Banco Santander México amounted to 63,703 million pesos and 54,925 million pesos, respectively.
Incorporation of Openbank Santander México, S.A. de C.V.
On October 14, 2020, the Bank received authorization from SHCP to incorporate Openbank Santander México, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada, Grupo Financiero Santander México (Openbank) as a subsidiary of the Bank. On November 16, 2020, Banco Santander (Spain) began the process of obtaining the applicable authorizations to operate Openbank as a commercial bank. This entity is not currently operating.
Merchant business
On December 3, 2020, the Bank entered into an assignment agreement with SMPS Merchant Platform Solutions México, S.A. de C.V. (SMPS), subsidiary entity of Santander Merchant Platform Solutions México, S.A. de C.V., in order to sell all the acquisition contracts related to the merchant business operated and administered by the Bank, along with their respective economic rights. The agreed sell price amounts to 1,600 million pesos.
Simultaneously, the Bank and SMPS entered into a service provision contract that stipulates that the Bank will provide administrative, operational and collection support services to cover the needs related to the merchant business acquisition contracts acquired by SMPS.
As of the date of issuance of the consolidated financial statements, SPMS has not obtained the registration to be able to operate as a Participant in Disposal Networks (Participante en Redes de Medios de Disposición) in its capacity as Acquirer (Adquirente) in accordance with the General Provisions applicable to Disposal Networks (Disposiciones de Carácter general aplicables a las Redes de Medios de Disposición) issued by the CNBV and the Mexican Central Bank. Once SMPS obtains the authorization, this transaction will be closed, which is estimated to occur during March 2021.
b) Other significant events
COVID-19 pandemic Support Program
On March 26, 2020, the CNBV issued an official letter giving response to the proposal of the Association of Banks of Mexico (ABM by its Spanish acronym) for the implementation of various relief measures (Support Program) in order to support borrowers impacted by the COVID-19 pandemic and with the aim of guaranteeing the stability of the Financial System in Mexico.
The Bank implemented in March 2020 the Support Program, which includes the partial or total deferral of principal and/or interest payments for up to four months, with the possibility of extending it to two additional months, with respect to the total amount due from borrowers, without any interest charge.
The Support Program was applied to commercial loans, mortgage loans, and revolving and non-revolving consumer loans as well as for agricultural loans, as long as the loan was classified as performing according to Mexican Banking GAAP as of February 28, 2020. In the case of microcredits (microloans), the Support Program was only applied as long as the loan was classified as performing according to Mexican Banking GAAP as of March 31, 2020.
The Support Program was only valid if the Bank implemented the benefits no later than 120 days after the aforementioned dates.
In the event that the restructuring or renovation of a loan includes deductions, forgiveness, bonuses, or discounts on the due balance that have an impact on lower payments for borrowers, as a mechanism to strengthen the liquidity of them, banks could defer the constitution of the allowance for impairment losses for Mexican Banking GAAP, related with the granting of deductions, forgiveness, bonuses and discounts to the customers.
Those modifications to the original conditions of performing loans, in which the risk profiles of the borrower were adjusted and did not imply a total or partial deferral of principal and/or interests are not considered as a restructuring for Mexican Banking GAAP purposes, as long as:
| ● | The loans are considered performing as of February 28, 2020. |
| ● | The contractual procedures for renewal or restructuring ended no later than 120 calendar days after February 2020. |
| ● | Such modifications shall be applicable for a period that could not exceed more than six months; banks are required to maintain the original established risk profiles according with their policies and procedures. |
In applying the Support Program, banks must observe the following conditions:
| ● | Not to make contractual modifications that explicitly or implicitly consider the capitalization of interests, nor the collection of any type of commission derived from the restructuring. |
| ● | Credit lines previously authorized to revolving consumer credit card loans should not be restricted, reduced by more than 50% of the unused portion or canceled. |
| ● | Credit lines previously authorized to commercial loans should not be restricted, reduced or canceled. |
| ● | Not to request additional guarantees or its substitution in the case of restructuring. |
Banks must deliver to the CNBV the general conditions of the granted Support Program, as well as a detailed report on the loans benefited within ten business days following the end of each month, beginning in March 2020 with the documentation process of the benefits granted.
Bank’s Management applied its professional judgment in analyzing if the contractual terms and conditions of the loans benefited by the Support Program change substantially with respect to the original granted loan, concluding that the modified contractual cash flows on the financial assets do not result in derecognition as established by IFRS 9.
As of December 31, 2020, 531,636 loans for an amount of 150,809 million were registered in the Support Program as follows:
| | | | |
|
|
| Support programs
|
|
|
|
|
|
| By loan type:
|
| | |
| Commercial, financial and industrial loans
|
| | 58,479
|
| Mortgage loans
|
| | 64,235
|
| Installment loans to individuals -
|
| | 28,095
|
| Revolving consumer credit card loans
|
|
| 8,770
|
| Non-revolving consumer loans
|
|
| 19,325
|
|
|
|
| 150,809
|
|
The breakdown of Losses on modification of financial assets recognized in the consolidated income statement is presented in Note 11.
Credit restructuring measures
On September 24, 2020, SHCP and CNBV issued an optional package of measures for credit restructuring. These relief measures encourage and allow banks and other financial intermediaries to restructure the loans of customers who request it. These measures consist in various options such as extension of terms, reduction of interest rates or eventual reductions and a term of up to five years (sixty months), depending on the customer and institution.
Additionally, on November 9, 2020, the CNBV issued regulatory facilities for credit institutions that implement “Institutional Restructuring Programs”, in order to offer better credit conditions to their customers.
The Bank decided not to apply the optional restructuring measures nor other “Institutional Restructuring Program”.
4. Distribution of the Bank’s profit and Earnings per share
4.1 Distribution of the Bank’s profit
The distributions of the Bank’s profit ended December 31, 2018, 2019 and 2020 approved by the Board of Directors during the annual general meetings are as follows:
| | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Profit of the year | | | 19,356 | | | 20,381 | | | 18,974 | Dividends declared | | | 9,228 | | | 10,293 | | | — | Dividend per share (pesos) | | | 1.36 | | | 1.52 | | | — | Date of payment | | | 06/29/2018 and | | | 05/28/2019 and | | | | | | | 12/28/2018 | | | 12/27/2019 | | | |
In order to strengthen banking institutions so they could be in a better position to absorb potentials losses that could arise because of the COVID-19 pandemic and have more resources to support the economic slowdown, the CNBV issued two recommendations to avoid:
a)The payment of dividends to shareholders, and
b)Carry out share buybacks or any other mechanism aimed at rewarding shareholders.
Considering the effects of the COVID-19 pandemic and on the recommendation received from the CNBV, the Bank decided not to pay dividends or carry out share buybacks in 2020.
4.2 Earnings per share
According to IAS 33 Earnings per share, the Bank should present and adjust retrospectively, the basic and diluted earnings per share, if the number of ordinary or potential shares outstanding increases as a result of a capitalization, bonus issue or share split, or decreases as a result of a reverse share split.
i. Basic earnings per share
Basic earnings per share are calculated by dividing the profit attributable to the Parent by the weighted average number of shares outstanding during the year, excluding the average number of treasury shares, if any, held in the year (see Note 29.d).
Accordingly, basic earnings per share were determined as follows:
| | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Profit attributable to the Parent | | | 19,353 | | | 20,381 | | | 18,974 | Profit attributable to the Parent (net of non-controlling interest) | | | 19,353 | | | 20,381 | | | 18,974 | Weighted average number of shares outstanding | | | 6,776,220,369 | | | 6,775,455,458 | | | 6,776,640,349 | Basic earnings per share (pesos) | | | 2.86 | | | 3.01 | | | 2.80 |
ii. Diluted earnings per share
In calculating diluted earnings per share, the amount of profit attributable to the Parent and the weighted average number of shares issued, excluding the average number of treasury shares, are adjusted to consider all the dilutive effects inherent to potential shares (see Note 29.d).
Accordingly, diluted earnings per share were determined as follows:
| | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Profit attributable to the Parent | | | 19,353 | | | 20,381 | | | 18,974 | Profit attributable to the Parent (net of non-controlling interest) | | | 19,353 | | | 20,381 | | | 18,974 | Weighted average number of shares outstanding | | | 6,776,220,369 | | | 6,775,455,458 | | | 6,776,640,349 | Dilutive effect of rights on shares | | | 10,773,988 | | | 11,538,899 | | | 10,354,008 | Adjusted number of shares | | | 6,786,994,357 | | | 6,786,994,357 | | | 6,786,994,357 | Diluted earnings per share (pesos) | | | 2.85 | | | 3.00 | | | 2.80 |
5. Compensation of directors, executive officers and other key management personnel
The Bank considers as key management personnel the directors, the executive officers and the members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee and the remuneration committee.
During 2019, the General Director of Operations and the General Director of IT decided to step down.
During 2020, the Deputy General Director of Global Corporate Banking, the Deputy General Director of New Businesses, the Vice President of Commercial Banking and the Deputy General Director of Transactions and Digital Banking decided to step down. Other than the aforementioned personnel change, there were no significant changes in the Bank’s main key personnel from December 31, 2020 to the date on which these consolidated financial statements were authorized for issue.
a) Remuneration of directors
Our shareholders establish the compensation of our directors at the annual shareholders’ meeting. Accordingly, only independent directors receive compensation for their duties. Under Mexican law, we are not required to disclose on an individual basis the compensation of our directors, our executive
officers and the members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee and the remuneration committee and we do not otherwise publicly disclose such information.
The aggregate compensation paid to independent directors who were members of the audit committee, the corporate practices, the nominating and compensation committee, the comprehensive risk management committee, the remuneration committee and the Board of Directors of the Bank amounted to 15 million pesos during 2018, 21 million pesos during 2019 and 23 million pesos during 2020, paid as attendance fees.
b) Remuneration of executive officers
The aggregate amount for compensation and benefits to executive officers amounted to 496 million pesos during 2018, 456 million pesos during 2019 and 431 million pesos during 2020. The main benefits paid to the Bank’s executive officers are: salary, Christmas bonus, vacation bonus, holidays, performance bonus and share-based payments.
The criteria for granting and paying bonus compensation vary according to the activities performed by the different areas and, therefore, payment of the bonus may vary depending on the department and activities performed by each member.
c) Post-employment and other long-term benefits
Our executive officers may participate in the same pension and medical expenses plan that is available to the Bank’s employees, but at different contribution percentages to the ones made by the rest of the employees.
The total post-employment benefits (including pension plan, medical expenses and life insurance policies) to executive officers amounted to 331 million pesos as of December 31, 2018, 472 million pesos as of December 31, 2019 and 522 million pesos as of December 31, 2020.
d) Long-term incentive plan 2015
Since September 2016, the Bank began to participate in a corporate share-based variable compensation plan denominated “Long-term incentive plan 2015” applicable only to a certain group of executive officers (Identified Staff). This plan provided a variable compensation linked to the growth of the earnings per share ratio and of the return on tangible equity of Banco Santander (Spain).
Details of the plan are presented in Note 42.b.
e) Loans to executive officers
The loans granted to executive officers amount to 102 million pesos and 124 million pesos as of December 31, 2019 and 2020, respectively.
f) COVID-19 pandemic
During the COVID-19 pandemic, the Bank’s priority has been the safeguard of the health and safety of the employees.
The most relevant measures taken by the Bank to achieve this objective are:
| ● | Provide to all the employees special safety and protection measures. |
| ● | Redefine the way of working to adapt to remote working, reaching more than 7,900 employees working from home. |
| ● | Ensure the physical and mental well-being of the employees who continued to work in corporate offices, or face to face with customers. These measures included providing masks, gloves and protective screens, as well as the reorganization of physical space to ensure the recommended social distance, combined with strict personal hygiene measures. |
| ● | Sent out newsletters including updates on the health crisis |
| ● | Financial well-being was also covered, offering various financial support measures to help employees who are experiencing financial difficulties, such as flexible loans or salary advances. |
| ● | Training and development programs were adapted to a new online format. In particular, those related to project management, leadership and remote working efficiency. |
The employees gradually returned to the usual workplaces at the end of May 2020, always following the recommendations of Mexican government, respecting the individual needs of each employee and based on three pillars: development and implementation of health and safety protocols, prioritization and monitoring the health status of the employees, and tracking and tracing (through health apps).
6. Cash and balances with the Central Bank
The breakdown by type of balances of Cash and balances with the Central Bank is as follows:
| | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Cash | | | 25,793 | | | 24,791 | Central Bank compulsory deposits | | | 28,094 | | | 23,978 | Deposits in the Central Bank | | | 11,292 | | | 22,264 | Accrued interest | | | 28 | | | 20 | | | | 65,207 | | | 71,053 |
Central Bank compulsory deposits relate to a minimum balance financial institutions are required to maintain with the Central Bank based on a percentage of deposits received from third parties.
As of December 31, 2020, the Bank recognized an special deposit in the Central Bank for an amount of $7,700 million pesos, based on Circular 9/2019 issued by the Mexican Central Bank on June 13, 2019. This Circular 9/2019 allows credit institutions that have Bonos de Regulación Monetaria Reportables (BREMS R) to use these financial instruments to guarantee overdrafts in their account in order to promote the healthy development of the Mexican financial system.
On April 1, 2020, the Mexican Central Bank in order to promote the healthy development of the financial system as a consequence of COVID-19 pandemic considers convenient to reduce the total amount of compulsory deposits through which it regulates the excess liquidity in the money market, so that banks may have additional resources to strengthen the continuity of their active operations, while maintaining an adequate implementation of monetary policy.
Note 45.a includes a breakdown of the remaining maturity of Cash and balances with the Central Bank. The compulsory deposits required by the Central Bank have an indefinite term. Additionally, Note 45.d includes the fair value amounts of these assets.
7. Loans and advances to credit institutions
The breakdown by classification, type and currency of the balances of Loans and advances to credit institutions in the consolidated balance sheets is as follows:
| | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Classification: | | | | | | | Other financial assets at fair value through profit or loss | | | 54,138 | | | 59,512 | Financial assets at amortized cost | | | 36,895 | | | 64,371 | | | | 91,033 | | | 123,883 | Type: | | | | | | | Reciprocal accounts | | | 14,597 | | | 11,610 | Time deposits | | | 29 | | | 10 | Guarantee deposits - Collateral delivered for OTC financial derivatives transactions (Note 32) | | | 14,300 | | | 27,954 | Reverse repurchase agreements | | | 54,138 | | | 59,512 | Other accounts | | | 7,969 | | | 24,797 | | | | 91,033 | | | 123,883 | Currency: | | | | | | | Peso | | | 73,268 | | | 94,084 | USD | | | 17,429 | | | 29,620 | Other currencies | | | 336 | | | 179 | | | | 91,033 | | | 123,883 |
As of December 31, 2019 and 2020, time deposits consist of 29 million pesos and 10 million pesos, respectively related to deposits that the Bank holds in Mexican banks that re-prices every 182 days with a fixed annual interest rate of 1.5%.
As of December 31, 2019 and 2020, 14,300 million pesos and 27,954 million pesos, respectively, of loans and advances to credit institutions, have been pledged in connection with OTC financial derivatives transactions, and are classified as restricted assets within Loans and advances to credit institutions – Financial assets at amortized cost (see Note 32).
As of December 31, 2021 and 2022, 58,235 million pesos and 102,431 million pesos, respectively, of debt instruments have been received as collaterals in connection with reverse repurchase agreement transactions within Loans and advances to credit institutions (see Note 31). Note 45.a includes a breakdown of the remaining maturity of Loans and advances to credit institutions. Additionally, Note 45.d includes the fair value amounts of these assets classified as Loans and advances to credit institutions – Financial assets at amortized cost. 8. Debt instruments a) Breakdown The breakdown by classification, type and currency of the balances of Debt instruments is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Classification: | | | | | | | Financial assets at fair value through profit or loss | | | 110,975 | | | 130,249 | Financial assets at fair value through other comprehensive income | | | 390,974 | | | 313,906 | Financial assets at amortized cost | | | 11,619 | | | 22,241 | | | | 513,568 | | | 466,396 | Type: | | | | | | | Mexican government debt securities | | | 336,872 | | | 355,658 | Of which: | | | | | | | Collateral delivered for OTC financial derivatives transactions (Note 32) | | | 1,509 | | | 1,417 | Foreign government debt securities | | | 165,955 | | | 102,005 | Of which: | | | | | | | Collateral delivered for OTC financial derivatives transactions (Note 32) | | | 4,866 | | | — | Brazilian Government Notes | | | 25,744 | | | 32,715 | US Government Treasury Bills (T-BILLS) | | | 113,155 | | | 69,290 | US Government Treasury Notes (T-NOTES) | | | 27,056 | | | — | Debt securities issued by financial institutions | | | 5,601 | | | 8,492 | Other debt securities | | | 5,140 | | | 241 | | | | 513,568 | | | 466,396 | Currency: | | | | | | | Peso | | | 310,871 | | | 343,790 | USD | | | 152,971 | | | 79,300 | Brazilian Real (BRL) | | | 25,744 | | | 32,715 | Other currencies | | | 23,982 | | | 10,591 | | | | 513,568 | | | 466,396 |
The breakdown of Debt instruments classified as at fair value through profit or loss is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Federal Treasury Securities (CETES) | | | 10,311 | | | 9,210 | United Mexican States Bonds (UMS) | | | 168 | | | 62 | Federal Mexican Government Development Bonds (BONDES) | | | 26,132 | | | 51,817 | M and M10 Mexican Government Bonds (M Bonds) | | | 16,652 | | | 15,294 | Mexican Bank Saving Protection Bonds (BPATS) | | | 14,161 | | | 3,463 | Federal Mexican Government Development Bonds in UDIS(1) (UDIBONDS) | | | 8,232 | | | 7,587 | T-BILLS | | | 13,328 | | | 34,324 | T-NOTES | | | 11,495 | | | — | Other debt securities | | | 10,496 | | | 8,492 | | | | 110,975 | | | 130,249 |
(1) UDIS are Unidades de Inversión, a peso-equivalent unit of account indexed for Mexican inflation. As of December 31, 2021 and 2022, one UDI was equal to 7.10823 pesos and 7.64680 pesos, respectively. As of December 31, 2021 and 2022, 6,375 million pesos and 1,417 million pesos, respectively, of debt instruments, have been pledged in connection with OTC financial derivatives transactions, and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss (see Note 32). As of December 31, 2021, 1,988 million pesos (1,565 million pesos in which the lender was the Central Bank) of Debt instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss. As of December 31, 2022 there were no debt instruments, have been pledged in connection with securities loan transactions. As of December 31, 2021 and 2022, 87,653 million pesos and 86,052 million pesos, respectively, of Debt instruments, have been pledged in connection with repurchase agreement transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss. The breakdown of Debt instruments classified as at Financial assets at fair value through other comprehensive income is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | UMS | | | 36,573 | | | 20,539 | M, M3 and M5 Mexican Government Bonds (M Bonds) | | | 197,658 | | | 211,518 | BPATS | | | 12,250 | | | 18,043 | UDIBONDS | | | 3,116 | | | 3,082 | T-BILLS | | | 99,827 | | | 34,966 | T-NOTES | | | 15,561 | | | — | Brazilian Government Notes | | | 25,744 | | | 25,517 | Other debt securities | | | 245 | | | 241 | | | | 390,974 | | | 313,906 |
As of December 31, 2021 and 2022, 103,095 million pesos and 119,213 million pesos, respectively, of Mexican government securities (M Bonds, BPATS, UMS and other debt securities) have been pledged in connection with repurchase agreement transactions, and are classified as restricted assets within Debt instruments – Financial assets at fair value through other comprehensive income. As of December 31, 2021 and 2022, 17,633 (13,999 million pesos in which the lender was the Central Bank) million pesos and 28,932 million pesos (28,353 million pesos in which the lender was the Central Bank), respectively, of Debt instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through other comprehensive income. The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at fair value through other comprehensive income as of December 31, 2021: | | | | | | | | | | | | | | | | | | Fair value | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | Mexican government debt instruments | | | 237,347 | | | — | | | 237,347 | | | — | | | 237,347 | Foreign government debt instruments | | | 141,132 | | | — | | | 141,132 | | | — | | | 141,132 | Debt instruments issued by the Central Bank | | | 12,250 | | | — | | | 12,250 | | | — | | | 12,250 | Other fixed-income interest debt instruments | | | 245 | | | — | | | 245 | | | — | | | 245 | | | | | | | | | | | | | | | | | | | | 390,974 | | | — | | | 390,974 | | | — | | | 390,974 |
The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at fair value through other comprehensive income as of December 31, 2022: | | | | | | | | | | | | | | | | | | Fair value | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | Mexican government debt instruments | | | 235,139 | | | — | | | 235,139 | | | — | | | 235,139 | Foreign government debt instruments | | | 60,483 | | | — | | | 60,483 | | | — | | | 60,483 | Debt instruments issued by the Central Bank | | | 18,043 | | | — | | | 18,043 | | | — | | | 18,043 | Other fixed-income interest debt instruments | | | 241 | | | — | | | 241 | | | — | | | 241 | | | | | | | | | | | | | | | | | | | | 313,906 | | | — | | | 313,906 | | | — | | | 313,906 |
During 2021 and 2022, there were no transfers between levels related to the fair value (neither the corresponding allowance for impairment losses) of Debt instruments – Financial assets at fair value through other comprehensive income. The breakdown by issuer rating of Debt instruments as of December 31, 2021 is as follows: | | | | | | | | | | | | | | | | | Private | | | | | | | | | | | | | | Debt | | | Sovereign Debt | | | Total | | | % | | | | | | | | | | | | | | | | AAA | | | — | | | 140,211 | | | 140,211 | | | 27.30 | % | A | | | 10,495 | | | 296,300 | | | 306,795 | | | 59.74 | % | BBB | | | 245 | | | 36,741 | | | 36,986 | | | 7.20 | % | BB | | | — | | | 3,832 | | | 3,832 | | | 0.75 | % | Below B | | | — | | | 25,744 | | | 25,744 | | | 5.01 | % | | | | 10,740 | | | 502,828 | | | 513,568 | | | 100 | % |
The breakdown by issuer rating of Debt instruments as of December 31, 2022 is as follows: | | | | | | | | | | | | | | | | | Private | | | | | | | | | | | | | | Debt | | | Sovereign Debt | | | Total | | | % | | | | | | | | | | | | | | | | AAA | | | — | | | 69,290 | | | 69,290 | | | 14.86 | % | A | | | 8,492 | | | 332,845 | | | 341,337 | | | 73.19 | % | BBB | | | 241 | | | 20,601 | | | 20,842 | | | 4.47 | % | BB | | | — | | | 2,211 | | | 2,211 | | | 0.47 | % | Below B | | | — | | | 32,716 | | | 32,716 | | | 7.01 | % | | | | 8,733 | | | 457,663 | | | 466,396 | | | 100 | % |
As of December 31, 2021 and 2022, BBB ratings balance includes mainly sovereign exposures in Mexico. As of December 31, 2021 and 2022, BB ratings balance includes mainly sovereign exposures in Mexico. As of December 31, 2022, Below B ratings balance includes mainly debt instruments issued by Brazilian Government Notes. The breakdown of Debt instruments classified as at Financial assets at amortized cost is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Special CETES | | | 3,831 | | | 2,211 | Bonos de Regulación Monetaria Reportables - (BREMS R) | | | 7,788 | | | 7,799 | MX and MX Mexican Government Bonds (M Bonds) | | | — | | | 1,666 | CETES | | | — | | | 2,375 | UDIBONDS | | | — | | | 992 | Brazilian Government Bonds | | | — | | | 7,198 | | | | 11,619 | | | 22,241 | | | | | | | | Type: | | | | | | | Unquoted | | | 3,831 | | | 2,211 | Quoted | | | 7,788 | | | 20,030 | | | | | | | |
As of December 31, 2021 and 2022, 7,709 million pesos and 7,720 million pesos, respectively, of BREMS R issued by the Mexican Central Bank have been pledged in connection with repurchase agreement transactions and are classified as restricted assets within Debt instruments – Financial assets at amortized cost. The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at amortized cost as of December 31, 2021: | | | | | | | | | | | | | | | | | | Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | | Financial assets at amortized cost (see Note 32). | As of December 31, 2019 and 2020, 54,097 million pesos and 59,599 million pesos, respectively, of
| | | | | | | | | | | | | | | Of which: | |
| | |
| | |
| | |
| | |
| | Mexican government debt instruments have been received as collaterals in connection with reverse repurchase agreement transactions within Loans and advances to credit institutions – Other financial assets at fair value through profit or loss (see Note 31). | Note 45.a includes a breakdown of the remaining maturity of Loans and advances to credit institutions. Additionally, Note 45.d includes the fair value amounts of these assets classified as Loans and advances to credit institutions – Financial assets at amortized cost.
|
| 11,619 | | F-115
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| 8. Debt instruments
| a) Breakdown
| The breakdown by classification, type and currency of the balances of Debt instruments is as follows:11,619
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Classification: | | | | | | | Financial assets at fair value through profit or loss | | | 110,613 | | | 206,272 | Financial assets at fair value through other comprehensive income | | | 233,463 | | | 355,321 | Financial assets at amortized cost | | | 11,257 | | | 11,453 | | | | 355,333 | | | 573,046 | Type: | | | | | | | Mexican government debt securities | | | 273,487 | | | 443,909 | Of which: | | | | | | | Collateral delivered for OTC financial derivatives transactions (Note 32) | | | 4,472 | | | 744 | Foreign government debt securities | | | 69,113 | | | 119,276 | Of which: | | | | | | | Collateral delivered for OTC financial derivatives transactions (Note 32) | | | — | | | 4,562 | Brazilian Government Notes | | | 30,225 | | | 23,870 | US Government Treasury Bills (T-BILLS) | | | 34,506 | | | 91,976 | US Government Treasury Notes (T-NOTES) | | | 4,382 | | | 3,430 | Debt securities issued by financial institutions | | | 2,270 | | | 3,413 | Other debt securities | | | 10,463 | | | 6,448 | | | | 355,333 | | | 573,046 | Currency: | | | | | | | Peso | | | 243,132 | | | 405,184 | USD | | | 47,897 | | | 108,411 | Brazilian Real (BRL) | | | 30,225 | | | 23,870 | Other currencies | | | 34,079 | | | 35,581 | | | | 355,333 | | | 573,046 |
| | The breakdown of the Debt instruments classified as at fair value through profit or loss is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Federal Treasury Securities (CETES) | | | 25,348 | | | 81,017 | United Mexican States Bonds (UMS) | | | 30 | | | 141 | Federal Mexican Government Development Bonds (BONDES) | | | 29,708 | | | 22,345 | M and M10 Mexican Government Bonds (M Bonds) | | | 11,601 | | | 51,313 | Mexican Bank Saving Protection Bonds (BPATS) | | | 13,750 | | | 22,623 | Federal Mexican Government Development Bonds in UDIS(1) (UDIBONDS) | | | 4,619 | | | 4,469 | T-BILLS | | | 10,928 | | | 12,342 | T-NOTES | | | 4,382 | | | 3,430 | Other debt securities | | | 10,247 | | | 8,592 | | | | 110,613 | | | 206,272 |
| — | | UDIS are Unidades de Inversión, a peso-equivalent unit of account indexed for Mexican inflation. UDI is a unit of account created by the Central Bank on April 4, 1995, the value of which in pesos is indexed to inflation on a daily basis, as measured by the change in the Mexican National Consumer Price Index (
| Índice Nacional de Precios al Consumidor,11,619 hereinafter “INPC” by its Spanish acronym). Under a UDI-based loan or financial instrument, the customer’s nominal peso principal balance is converted either at origination or
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| upon restructuring to a UDI principal balance and interest on the loan or financial instrument is calculated on the outstanding UDI balance of the loan or financial instrument. The customer in an amount of pesos equivalent makes principal and interest payments to the amount due in UDI at the stated value of UDI on the day of payment. As of December 31, 2019 and 2020, one UDI was equal to 6.39901 pesos and 6.60559 pesos, respectively.
| As of December 31, 2019 and 2020, 4,472 million pesos and 5,306 million pesos, respectively, of debt instruments, have been pledged in connection with OTC financial derivatives transactions, and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss (see Note 32).
| As of December 31, 2019 and 2020, 8,678 million pesos (as of December 31, 2019 there were no transactions with the Central Bank) and 10,729 million pesos (4,655 million pesos in which the lender was the Central Bank), respectively, of Debt instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss.
| As of December 31, 2019 and 2020, 92,764 million pesos and 201,477 million pesos, respectively, of Debt instruments, have been pledged in connection with repurchase agreement transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss.
| The breakdown of the Debt instruments classified as at Financial assets at fair value through other comprehensive income is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | CETES | | | — | | | 1,272 | UMS | | | 43,058 | | | 48,447 | M, M3 and M5 Mexican Government Bonds (M Bonds) | | | 117,974 | | | 189,137 | BPATS | | | 11,499 | | | 8,616 | UDIBONDS | | | 4,643 | | | 3,076 | T-BILLS | | | 23,578 | | | 79,634 | Brazilian Government Notes | | | 30,225 | | | 23,870 | Other debt securities | | | 2,486 | | | 1,269 | | | | 233,463 | | | 355,321 |
| | As of December 31, 2019 and 2020, 96,681 million pesos and 129,240 million pesos, respectively, of Mexican government securities (M Bonds, BPATS, UMS and other debt securities) have been pledged in connection with repurchase agreement transactions, and are classified as restricted assets within Debt instruments – Financial assets at fair value through other comprehensive income.
| As of December 31, 2020, 4,998 million pesos, of Debt instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Debt instruments – Financial assets at fair value through profit or loss, of which in which the lender is the Central Bank.
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| The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at fair value through other comprehensive income as of December 31, 2020:
| | | | | | | | | | | | | | | | | | Fair value | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | Mexican government debt instruments | | | 241,932 | | | — | | | 241,932 | | | — | | | 241,932 | Foreign government debt instruments | | | 103,504 | | | — | | | 103,504 | | | — | | | 103,504 | Debt instruments issued by the Central Bank | | | 8,616 | | | — | | | 8,616 | | | — | | | 8,616 | Other fixed-income interest debt instruments | | | 1,269 | | | — | | | 1,269 | | | — | | | 1,269 | | | | | | | | | | | | | | | | | | | | 355,321 | | | — | | | 355,321 | | | — | | | 355,321 |
| | During 2020, there were no transfers between stages related to the fair value (neither the corresponding allowance for impairment losses) of Debt instruments – Financial assets at fair value through other comprehensive income.
| The breakdown by issuer rating of Debt instruments as of December 31, 2019 is as follows:
| | | | | | | | | | | | | | | | | Private | | | | | | | | | | | | | | Debt | | | Sovereign Debt | | | Total | | | % | | | | | | | | | | | | | | | | AAA | | | — | | | 38,888 | | | 38,888 | | | 10.94 | % | A | | | 12,480 | | | 226,928 | | | 239,408 | | | 67.38 | % | BBB | | | — | | | 43,088 | | | 43,088 | | | 12.13 | % | BB | | | — | | | 3,471 | | | 3,471 | | | 0.98 | % | Below B | | | — | | | 30,225 | | | 30,225 | | | 8.51 | % | Below BBB | | | 253 | | | — | | | 253 | | | 0.07 | % | | | | 12,733 | | | 342,600 | | | 355,333 | | | 100 | % |
The breakdown by issuer rating of Debt instruments as of December 31, 2020 is as follows:
| | | | | | | | | | | | | | | | | Private | | | | | | | | | | | | | | Debt | | | Sovereign Debt | | | Total | | | % | | | | | | | | | | | | | | | | AAA | | | — | | | 95,406 | | | 95,406 | | | 16.65 | % | A | | | 9,596 | | | 391,651 | | | 401,247 | | | 70.02 | % | BBB | | | 267 | | | 48,587 | | | 48,854 | | | 8.53 | % | BB | | | — | | | 3,669 | | | 3,669 | | | 0.64 | % | Below B | | | — | | | 23,870 | | | 23,870 | | | 4.17 | % | | | | 9,863 | | | 563,183 | | | 573,046 | | | 100 | % |
As of December 31, 2019 and 2020, BBB ratings balance includes mainly sovereign exposures in Mexico.
As of December 31, 2019 and 2020, BB ratings balance includes mainly sovereign exposures in Mexico.
As of December 31, 2020, Below B ratings balance includes mainly debt instruments issued by Petróleos Mexicanos (Mexican state-owned petroleum company) and Brazilian Government Notes.
In April 2020, the rating agency Fitch downgraded Petróleos Mexicanos’ Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) to BB- from BB.
The breakdown of the Debt instruments classified as at Financial assets at amortized cost is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Special CETES | | | 3,471 | | | 3,668 | Bonos de Regulación Monetaria Reportables - (BREMS R) | | | 7,786 | | | 7,785 | | | | 11,257 | | | 11,453 | | | | | | | | Type: | | | | | | | Unquoted | | | 3,471 | | | 3,668 | Quoted | | | 7,786 | | | 7,785 | | | | | | | |
As of December 31, 2019 and 2020, 4,999 million pesos and 7,706 million pesos, respectively, of BREMS R issued by the Mexican Central Bank have been pledged in connection with repurchase agreement transactions and are classified as restricted assets within Debt instruments – Financial assets at amortized cost.
The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at amortized cost as of December 31, 2020:
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| Gross carrying amount
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| Stage 1
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| Stage 2
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| Financial assets at amortized cost
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| Of which:
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| Mexican government debt instruments
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| 11,453
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| 11,453
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| —
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| 11,453
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During 2020, there were no transfers between stages related to the gross carrying amount of Debt instruments – Financial assets at amortized cost.
b) Changes
The changes in Debt instruments – Financial assets at fair value through other comprehensive income, were as follows:
| | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Beginning balance | | | 164,947 | | | 154,483 | | | 233,463 | | Reclassification from Available-for-sale to Amortized cost | | | (73,131) | | | — | | | — | | Beginning balance as restated | | | 91,816 | | | 154,483 | | | 233,463 | | Net additions/(disposals) | | | 63,824 | | | 75,061 | | | 119,141 | | Valuation adjustments | | | (1,226) | | | 4,108 | | | 3,560 | | Amounts reclassified to the consolidated income statement | | | 69 | | | (189) | | | (843) | | Balance at year-end | | | 154,483 | | | 233,463 | | | 355,321 | |
c) Allowance for impairment losses
The following is a breakdown of the allowance for impairment losses of Debt instruments classified at fair value through other comprehensive income and at amortized cost as of December 31, 2019:
| | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Written-off financial assets | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 23 | | | — | | | — | | | 23 | | | — | Of which: | | | | | | | | | | | | | | | | Mexican government debt instruments | | | 22 | | | — | | | — | | | 22 | | | — | Other fixed-income interest debt instruments | | | 1 | | | — | | | — | | | 1 | | | — | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | — | | | — | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | 23 | | | — | | | — | | | 23 | | | — |
The following is a breakdown of the allowance for impairment losses of Debt instruments classified at fair value through other comprehensive income and at amortized cost as of December 31, 2020:
| | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Written-off financial assets | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 91 | | | — | | | — | | | 91 | | | — | Of which: | | | | | | | | | | | | | | | | Mexican government debt instruments | | | 89 | | | — | | | — | | | 89 | | | — | Other fixed-income interest debt instruments | | | 2 | | | — | | | — | | | 2 | | | — | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | — | | | — | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | 91 | | | — | | | — | | | 91 | | | — |
The change in the allowance for impairment losses of Debt instruments – Financial assets at fair value through other comprehensive income during 2019 and 2020, amounts to 3 million pesos and 68 million pesos, respectively.
There were no allowance for impairment losses recognized during 2019 and 2020, related to Debt instruments – Financial assets at amortized cost.
d) Other information
Note 45.a contains a breakdown of the remaining maturity periods of Financial assets at fair value through other comprehensive income - Debt Instruments. Additionally, Note 45.d includes the fair value amounts of these assets classified as Debt instruments – Financial assets at amortized cost.
9. Equity instruments
a) Breakdown
The breakdown by classification and type of Equity instruments is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Classification: | | | | | | | Financial assets at fair value through profit or loss | | | 5,767 | | | 1,911 | Financial assets at fair value through other comprehensive income | | | 642 | | | 768 | | | | 6,409 | | | 2,679 | Type: | | | | | | | Shares of Mexican companies | | | 6,409 | | | 2,679 | Shares of foreign companies | | | — | | | — | | | | 6,409 | | | 2,679 |
As of December 31, 2019 and 2020, 14 million pesos and 137 million pesos, respectively, of equity instruments have been received as guarantees and/or collateral in connection with the securities loan transactions within Equity instruments – Financial assets at fair value through profit or loss (see Note 31).
As of December 31, 2019, there were no equity instruments pledged in connection with securities loan transactions. As of December 31, 2020, 7 million pesos, of equity instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Equity instruments – Financial assets at fair value through profit or loss.
Note 45.a contains a breakdown of the remaining maturity periods of these assets.
b) Changes
The changes in Equity instruments – Financial assets at fair value through other comprehensive income, were as follows:
| | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Beginning balance as of January 1 | | | 795 | | | 535 | | | 642 | | Recognition of own equity instruments held for future equity-settled share-based payments (Note 3) | | | (247) | | | — | | | — | | Transfer to non-current assets held for sale | | | — | | | — | | | — | | Net additions/(disposals) | | | — | | | — | | | — | | Valuation adjustments | | | (13) | | | 107 | | | 126 | | Amounts reclassified to the consolidated income statement | | | — | | | — | | | — | | Balance at year-end | | | 535 | | | 642 | | | 768 | |
Note 28.a includes a breakdown of the valuation adjustments recognized in other comprehensive income under Valuation adjustments – Financial assets at fair value through other comprehensive income.
10. Trading derivatives (assets and liabilities) and Short positions
a) Trading derivatives
The breakdown by type of inherent risk of the fair value of Trading derivatives arranged by the Bank is as follows (see Note 32):
| | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | Debit | | | Credit | | | Debit | | | Credit | | | | Balance | | | Balance | | | Balance | | | Balance | | | | | | | | | | | | | | Interest rate risk | | | 80,499 | | | 76,639 | | | 196,402 | | | 189,841 | Currency risk | | | 71,026 | | | 67,623 | | | 99,606 | | | 95,406 | Market price risk | | | 222 | | | 219 | | | 163 | | | 864 | | | | 151,747 | | | 144,481 | | | 296,171 | | | 286,111 |
Note 45.a contains a breakdown of the remaining maturity periods of Trading derivatives.
b) Short positions
Following is a breakdown of the carrying amount of Short positions:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Securities loans: | | | | | | | Debt instruments | | | 8,280 | | | 15,263 | Equity instruments | | | — | | | — | | | | 8,280 | | | 15,263 | Short sales: | | | | | | | Debt instruments | | | 839 | | | 102 | | | | 9,119 | | | 15,365 |
Note 45.a contains a breakdown of the remaining maturity periods of these liabilities.
11. Loans and advances to customers
a) Detail
The detail by classification of Loans and advances to customers in the consolidated balance sheets is as follows:
| | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | Other financial assets at fair value through profit or loss | | | 25,789 | | | 10,844 | | Financial assets at fair value through other comprehensive income | | | 2,875 | | | — | | Financial assets at amortized cost | | | 699,671 | | | 687,432 | | | | | 728,335 | | | 698,276 | | Of which: | | | | | | | | Before allowance for impairment losses | | | 750,305 | | | 723,827 | | Allowance for impairment losses | | | (21,970) | | | (25,551) | | | | | 728,335 | | | 698,276 | |
As of December 31, 2019 and 2020, 5,153 million pesos and 4,123 million pesos, respectively, of Loans and advances to customers have been pledged in connection with financial derivatives traded in organized
markets, and are classified as restricted assets within Loans and advances to customers – Other financial assets at fair value through profit or loss (see Note 32).
Note 45.a includes a breakdown of the remaining maturity of Loans and advances to customers. Additionally, Note 45.d includes the fair value amounts of these assets classified as Loans and advances to customers – Financial assets at amortized cost.
b) Breakdown
The following is a breakdown by loan type, borrower sector, geographical area of residence and interest rate formula of the Loans and advances to customers. This breakdown reflects the Bank’s exposure to credit risk in its core business, disregarding the allowance for impairment losses:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | By loan type: | | | | | | | Commercial, financial and industrial loans | | | 373,943 | | | 339,545 | Public sector loans | | | 70,450 | | | 73,016 | Mortgage loans | | | 147,810 | | | 167,818 | Reverse repurchase agreements | | | 25,789 | | | 10,844 | Installment loans to individuals - | | | | | | | Revolving consumer credit card loans | | | 57,760 | | | 51,266 | Non-revolving consumer loans | | | 56,601 | | | 59,429 | Impaired loans | | | 17,952 | | | 21,909 | | | | 750,305 | | | 723,827 | By borrower sector: | | | | | | | Public sector | | | 70,450 | | | 73,016 | Individuals | | | 274,053 | | | 290,580 | Communications and transportation | | | 35,773 | | | 33,250 | Construction | | | 47,872 | | | 38,160 | Manufacturing | | | 63,652 | | | 53,187 | Services | | | 122,970 | | | 109,180 | Tourism | | | 25,244 | | | 26,275 | Other sectors | | | 110,291 | | | 100,179 | | | | 750,305 | | | 723,827 | By geographical area: | | | | | | | Mexico | | | 750,305 | | | 723,827 | | | | 750,305 | | | 723,827 | By interest rate: | | | | | | | Fixed rate | | | 270,930 | | | 307,990 | Floating rate | | | 479,375 | | | 415,837 | | | | 750,305 | | | 723,827 |
As of December 31, 2019 and 2020, 8,115 million pesos and 6,398 million pesos, respectively, of debt instruments have been received as collaterals in connection with reverse repurchase agreement transactions within Loans and advances to customers – Other financial assets at fair value through profit or loss (see Note 31).
c) Valuation adjustments for impairment of Loans and advances to customers
The following is a breakdown of the gross carrying amount of Loans and advances to customers – Financial assets at fair value through other comprehensive income and at amortized cost as of December 31, 2019:
| | | | | | | | | | | | | | | | | | Fair value/Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 (*) | | | Total | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 2,880 | | | — | | | 2,880 | | | — | | | 2,880 | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 2,880 | | | — | | | 2,880 | | | — | | | 2,880 | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | 676,508 | | | 27,176 | | | 703,684 | | | 17,952 | | | 721,636 | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 358,665 | | | 12,398 | | | 371,063 | | | 5,815 | | | 376,878 | Public sector loans | | | 70,450 | | | — | | | 70,450 | | | — | | | 70,450 | Mortgage loans | | | 140,072 | | | 7,738 | | | 147,810 | | | 8,399 | | | 156,209 | Installment loans to individuals - | | | 107,321 | | | 7,040 | | | 114,361 | | | 3,738 | | | 118,099 | Revolving consumer credit card loans | | | 54,292 | | | 3,468 | | | 57,760 | | | 1,717 | | | 59,477 | Non-revolving consumer loans | | | 53,029 | | | 3,572 | | | 56,601 | | | 2,021 | | | 58,622 | | | | | | | | | | | | | | | | |
(*) As of December 31, 2019,
|
The following is a breakdown of the gross carrying amount of Debt instruments – Financial assets at amortized cost as of December 31, 2022: | | | | | | | | | | | | | | | | | | Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | Mexican government debt instruments | | | 7,244 | | | — | | | 7,244 | | | — | | | 7,244 | Foreign government debt instruments | | | 7,198 | | | — | | | 7,198 | | | — | | | 7,198 | Debt instruments issued by the Mexican Central Bank | | | 7,799 | | | — | | | 7,799 | | | — | | | 7,799 | | | | | | | | | | | | | | | | | | | | 22,241 | | | — | | | 22,241 | | | — | | | 22,241 |
During 2021 and 2022, there were no transfers between stages related to the gross carrying amount of Debt instruments – Financial assets at amortized cost. b) Changes The changes in Debt instruments – Financial assets at fair value through other comprehensive income, were as follows: | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Beginning balance | | | 233,463 | | | 355,321 | | | 390,974 | | Net additions/(disposals) | | | 119,141 | | | 43,105 | | | (70,267) | | Valuation adjustments | | | 3,560 | | | (6,724) | | | (6,705) | | Amounts reclassified to the consolidated income statement | | | (843) | | | (728) | | | (96) | | Balance at year-end | | | 355,321 | | | 390,974 | | | 313,906 | |
c) Allowance for impairment losses The following is a breakdown of the allowance for impairment losses of Debt instruments classified at fair value through other comprehensive income as of December 31, 2021: | | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Written-off financial assets | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 39 | | | — | | | — | | | 39 | | | — | Of which: | | | | | | | | | | | | | | | | Mexican government debt instruments | | | 38 | | | — | | | — | | | 38 | | | — | Other fixed-income interest debt instruments | | | 1 | | | — | | | — | | | 1 | | | — | | | | | | | | | | | | | | | | | | | | 39 | | | — | | | — | | | 39 | | | — |
The following is a breakdown of the allowance for impairment losses of Debt instruments classified at fair value through other comprehensive income as of December 31, 2022: | | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Written-off financial assets | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 22 | | | — | | | — | | | 22 | | | — | Of which: | | | | | | | | | | | | | | | | Mexican government debt instruments | | | 22 | | | — | | | — | | | 22 | | | — | Other fixed-income interest debt instruments | | | 1 | | | — | | | — | | | 1 | | | — | | | | | | | | | | | | | | | | | | | | 22 | | | — | | | — | | | 22 | | | — |
The change in the allowance for impairment losses of Debt instruments – Financial assets at fair value through other comprehensive income during 2021 and 2022, amounts to (52) million pesos and (17) million pesos, respectively. There were no allowance for impairment losses recognized during 2021 and 2022, related to Debt instruments – Financial assets at amortized cost. d) Other information Note 45.a contains a breakdown of the remaining maturity periods of Financial assets at fair value through other comprehensive income - Debt Instruments. Additionally, Note 45.d includes the fair value amounts of these assets classified as Debt instruments – Financial assets at amortized cost. 9. Equity instruments a) Breakdown The breakdown by classification and type of Equity instruments is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Classification: | | | | | | | Financial assets at fair value through profit or loss | | | 2,764 | | | 4,063 | Financial assets at fair value through other comprehensive income | | | 799 | | | 697 | | | | 3,563 | | | 4,760 | Type: | | | | | | | Shares of Mexican companies | | | 3,563 | | | 4,760 | | | | 3,563 | | | 4,760 |
As of December 31, 2021 and 2022, 74 million pesos and 1 million pesos, respectively, of equity instruments have been received as guarantees and/or collateral in connection with the securities loan transactions within Equity instruments – Financial assets at fair value through profit or loss (see Note 31). As of December 31, 2021 and 2022, 81 million pesos and 410 million pesos, respectively, of equity instruments, have been pledged in connection with securities loan transactions and are classified as restricted assets within Equity instruments – Financial assets at fair value through profit or loss. Note 45.a contains a breakdown of the remaining maturity periods of these assets. b) Changes The changes in Equity instruments – Financial assets at fair value through other comprehensive income, were as follows: | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Beginning balance as of January 1 | | | 642 | | | 768 | | | 799 | | Write-off of equity instruments | | | — | | | — | | | 63 | | Net additions/(disposals) | | | — | | | 148 | | | (147) | | Valuation adjustments | | | 126 | | | (117) | | | (18) | | Balance at year-end | | | 768 | | | 799 | | | 697 | |
Note 28.a includes a breakdown of the valuation adjustments recognized in other comprehensive income under Valuation adjustments – Financial assets at fair value through other comprehensive income. 10. Trading derivatives (assets and liabilities) and Short positions a) Trading derivatives The breakdown by type of inherent risk of the fair value of Trading derivatives arranged by the Bank is as follows (see Note 32): | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | | | | | | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | | | | | | | | | | | | Interest rate risk | | | 95,607 | | | 94,515 | | | 159,830 | | | 166,198 | Currency risk | | | 83,653 | | | 80,189 | | | 68,812 | | | 62,773 | Market price risk | | | 130 | | | 1,974 | | | 174 | | | 2,217 | | | | 179,390 | | | 176,678 | | | 228,816 | | | 231,188 |
Note 45.a contains a breakdown of the remaining maturity periods of Trading derivatives. b) Short positions Following is a breakdown of the carrying amount of Short positions: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Securities loans: | | | | | | | Debt instruments | | | 19,109 | | | 28,345 | Equity instruments | | | 14 | | | 318 | | | | 19,123 | | | 28,663 | Short sales: | | | | | | | Debt instruments | | | 431 | | | 99 | | | | 19,554 | | | 28,762 |
Note 45.a contains a breakdown of the remaining maturity periods of these liabilities. 11. Loans and advances to customers a) Detail The detail by classification of Loans and advances to customers in the consolidated balance sheets is as follows: | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | Financial assets at fair value through profit or loss | | | 10,000 | | | 19,207 | | Financial assets at fair value through other comprehensive income | | | 4,056 | | | 946 | | Financial assets at amortized cost | | | 736,997 | | | 797,716 | | | | | 751,053 | | | 817,869 | | Of which: | | | | | | | | Before allowance for impairment losses | | | 772,088 | | | 839,521 | | Allowance for impairment losses | | | (21,035) | | | (21,652) | | | | | 751,053 | | | 817,869 | |
As of December 31, 2021 and 2022, 6,261 million pesos and 6,530 million pesos, respectively, of Loans and advances to customers have been pledged in connection with financial derivatives traded in organized markets, and are classified as restricted assets within Loans and advances to customers (see Note 32). Note 45.a includes a breakdown of the remaining maturity of Loans and advances to customers. Additionally, Note 45.d includes the fair value amounts of these assets classified as Loans and advances to customers – Financial assets at amortized cost. b) Breakdown The following is a breakdown by loan type, borrower sector, geographical area of residence and interest rate of the Loans and advances to customers. This breakdown reflects the Bank’s exposure to credit risk in its core business, disregarding the allowance for impairment losses: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | By loan type: | | | | | | | Commercial, financial and industrial loans | | | 344,684 | | | 362,069 | Public sector loans | | | 85,189 | | | 84,583 | Mortgage loans | | | 189,854 | | | 205,242 | Reverse repurchase agreements | | | 10,000 | | | 19,207 | Installment loans to individuals - | | | | | | | Revolving consumer credit card loans | | | 52,089 | | | 63,782 | Non-revolving consumer loans | | | 67,619 | | | 83,435 | Impaired loans | | | 22,653 | | | 21,203 | | | | 772,088 | | | 839,521 | By borrower sector: | | | | | | | Public sector | | | 85,256 | | | 84,583 | Individuals | | | 326,117 | | | 374,707 | Communications and transportation | | | 35,756 | | | 34,757 | Construction | | | 37,232 | | | 30,864 | Manufacturing | | | 52,176 | | | 53,302 | Services | | | 123,078 | | | 137,525 | Tourism | | | 18,278 | | | 20,840 | Other sectors | | | 94,195 | | | 102,943 | | | | 772,088 | | | 839,521 | By geographical area: | | | | | | | Mexico | | | 772,088 | | | 839,521 | | | | 772,088 | | | 839,521 | By interest rate: | | | | | | | Fixed rate | | | 359,178 | | | 332,396 | Floating rate | | | 412,910 | | | 507,125 | | | | 772,088 | | | 839,521 |
c) Valuation adjustments for impairment of Loans and advances to customers The following is a breakdown of the gross carrying amount of Loans and advances to customers – Financial assets at amortized cost as of December 31, 2021: | | | | | | | | | | | | | | | | | | Fair value/Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 (*) | | | Total | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 4,063 | | | — | | | 4,063 | | | — | | | 4,063 | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 4,063 | | | — | | | 4,063 | | | — | | | 4,063 | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | 698,089 | | | 37,283 | | | 735,372 | | | 22,653 | | | 758,025 | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 322,835 | | | 17,786 | | | 340,621 | | | 9,870 | | | 350,491 | Public sector loans | | | 83,788 | | | 1,401 | | | 85,189 | | | 67 | | | 85,256 | Mortgage loans | | | 178,822 | | | 11,032 | | | 189,854 | | | 9,725 | | | 199,579 | Installment loans to individuals - | | | 112,644 | | | 7,064 | | | 119,708 | | | 2,991 | | | 122,699 | Revolving consumer credit card loans | | | 48,556 | | | 3,533 | | | 52,089 | | | 1,328 | | | 53,417 | Non-revolving consumer loans | | | 64,088 | | | 3,531 | | | 67,619 | | | 1,663 | | | 69,282 | | | | | | | | | | | | | | | | |
(*) As of December 31, 2021, there were no POCI financial assets. The following is a breakdown of the gross carrying amount Loans and advances to customers – Financial assets at amortized cost and Loans and advances to customers – Financial assets at fair value through other comprehensive income as of December 31, 2022: | | | | | | | | | | | | | | | | | | Fair value/Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 (*) | | | Total | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 946 | | | — | | | 946 | | | — | | | 946 | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 946 | | | — | | | 946 | | | — | | | 946 | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | 752,073 | | | 46,092 | | | 798,165 | | | 21,203 | | | 819,368 | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 339,283 | | | 21,840 | | | 361,123 | | | 5,587 | | | 366,710 | Public sector loans | | | 84,583 | | | — | | | 84,583 | | | — | | | 84,583 | Mortgage loans | | | 193,339 | | | 11,903 | | | 205,242 | | | 11,867 | | | 217,109 | Installment loans to individuals - | | | 134,868 | | | 12,349 | | | 147,217 | | | 3,749 | | | 150,966 | Revolving consumer credit card loans | | | 58,196 | | | 5,586 | | | 63,782 | | | 1,175 | | | 64,957 | Non-revolving consumer loans | | | 76,672 | | | 6,763 | | | 83,435 | | | 2,574 | | | 86,009 | | | | | | | | | | | | | | | | |
(*) As of December 31, 2022, there were no POCI financial assets. The following is a breakdown of the transfers of Loans and advances to customers – Financial assets at amortized cost between stages as of December 31, 2021: | | | | | | | | | | | | | | | Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | As of January 1, 2021 | | | 620,543 | | | 70,531 | | | 21,909 | | | 712,983 | Transfers: | | | | | | | | | | | | | Transfer from Stage 1 to Stage 2 | | | (13,356) | | | 13,356 | | | — | | | — | Transfer from Stage 1 to Stage 3 | | | (6,050) | | | — | | | 6,050 | | | — | Transfer from Stage 2 to Stage 3 | | | — | | | (7,787) | | | 7,787 | | | — | Transfer from Stage 2 to Stage 1 | | | 20,699 | | | (20,699) | | | — | | | — | Transfer from Stage 3 to Stage 2 | | | — | | | 2,013 | | | (2,013) | | | — | Transfer from Stage 3 to Stage 1 | | | 1,102 | | | — | | | (1,102) | | | — | | | | | | | | | | | | | | Remaining in same Stage | | | (44,490) | | | (4,783) | | | 19,608 | | | (29,665) | Financial assets derecognized during the period other than write-offs | | | (274,147) | | | (17,278) | | | (3,311) | | | (294,736) | Originated financial assets | | | 412,352 | | | — | | | — | | | 412,352 | Write-offs | | | — | | | — | | | (26,477) | | | (26,477) | Other movements | | | (18,564) | | | 1,930 | | | 202 | | | (16,432) | As of December 31, 2021 | | | 698,089 | | | 37,283 | | | 22,653 | | | 758,025 |
The following is a breakdown of the transfers of Loans and advances to customers – Financial assets at amortized cost between stages as of December 31, 2022: | | | | | | | | | | | | | | | Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | As of January 1, 2022 | | | 698,089 | | | 37,283 | | | 22,653 | | | 758,025 | Transfers: | | | | | | | | | | | | | Transfer from Stage 1 to Stage 2 | | | (23,492) | | | 23,492 | | | — | | | — | Transfer from Stage 1 to Stage 3 | | | (6,921) | | | | | | 6,921 | | | — | Transfer from Stage 2 to Stage 3 | | | — | | | (6,508) | | | 6,508 | | | — | Transfer from Stage 2 to Stage 1 | | | 6,169 | | | (6,169) | | | — | | | — | Transfer from Stage 3 to Stage 2 | | | — | | | 5,390 | | | (5,390) | | | — | Transfer from Stage 3 to Stage 1 | | | 907 | | | — | | | (907) | | | — | | | | | | | | | | | | �� | | Remaining in same Stage (*) | | | (48,693) | | | (2,221) | | | 13,515 | | | (37,399) | Financial assets derecognized during the period other than write-offs | | | (202,136) | | | (5,204) | | | (2,985) | | | (210,325) | Originated financial assets | | | 327,309 | | | — | | | — | | | 327,309 | Write-offs | | | — | | | — | | | (19,169) | | | (19,169) | Other movements | | | 841 | | | 29 | | | 57 | | | 927 | As of December 31, 2022 | | | 752,073 | | | 46,092 | | | 21,203 | | | 819,368 |
(*) Includes mainly payments of principal and accrued interest. Transfers between stages | ● | The change in the gross carrying amount of Loans and advances to customers – Financial assets at amortized cost asthat were transferred from Stage 2 to Stage 1 amounting 6,169 million pesos, resulted |
| | in a decrease in the allowance for impairment losses of December 31, 2020: | | | | | | | | | | | | | | | | | | Fair value/Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Subtotal | | | Stage 3 (*) | | | Total | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | 620,543 | | | 70,531 | | | 691,074 | | | 21,909 | | | 712,983 | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 291,980 | | | 47,565 | | | 339,545 | | | 6,530 | | | 346,075 | Public sector loans | | | 73,016 | | | — | | | 73,016 | | | — | | | 73,016 | Mortgage loans | | | 157,054 | | | 10,764 | | | 167,818 | | | 9,847 | | | 177,665 | Installment loans to individuals - | | | 98,493 | | | 12,202 | | | 110,695 | | | 5,532 | | | 116,227 | Revolving consumer credit card loans | | | 44,309 | | | 6,957 | | | 51,266 | | | 2,543 | | | 53,809 | Non-revolving consumer loans | | | 54,184 | | | 5,245 | | | 59,429 | | | 2,989 | | | 62,418 | | | | | | | | | | | | | | | | |
(*) As of December 31, 2020, there were no POCI financial assets.
437 million pesos. The following is a breakdownmain driver of the transfers of Loans and advanceschange is the increase in the “Lifetime PD” used to customers – Financial assets at amortized cost between stages as of December 31, 2020: | | | | | | | | | | | | | | | Gross carrying amount | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | As of January 1, 2020 | | | 676,508 | | | 27,176 | | | 17,952 | | | 721,636 | Transfers: | | | | | | | | | | | | | Transfer from Stage 1 to Stage 2 | | | 4,700 | | | (4,700) | | | — | | | — | Transfer from Stage 1 to Stage 3 | | | 581 | | | — | | | (581) | | | — | Transfer from Stage 2 to Stage 3 | | | — | | | 1,237 | | | (1,237) | | | — | Transfer from Stage 2 to Stage 1 | | | (36,761) | | | 36,761 | | | — | | | — | Transfer from Stage 3 to Stage 2 | | | — | | | (19,702) | | | 19,702 | | | — | Transfer from Stage 3 to Stage 1 | | | (8,792) | | | — | | | 8,792 | | | — | | | | | | | | | | | | | | Remaining in same Stage (*) | | | (577,716) | | | 32,952 | | | 1,224 | | | (543,540) | Financial assets derecognized during the period other than write-offs | | | (241) | | | (18) | | | (22) | | | (281) | Originated financial assets | | | 622,049 | | | — | | | — | | | 622,049 | Write-offs | | | — | | | — | | | (21,590) | | | (21,590) | Other movements | | | (59,785) | | | (3,175) | | | (2,331) | | | (65,291) | As of December 31, 2020 | | | 620,543 | | | 70,531 | | | 21,909 | | | 712,983 |
(*) Includes mainly payments of principal and accrued interest.
determine the allowance for impairment losses. |
| ● | The change in the gross carrying amount of Loans and advances to customers – Financial assets at amortized that were transferred from Stage 2 to Stage 1 amounting 36,761 million pesos, resulted in an additional allowance for impairment losses of 4,717 million pesos. The main driver of the change is the increase in the “Lifetime PD” used to determine the allowance for impairment losses. |
| ● | The change in the gross carrying amount of Loans and advances to customers – Financial assets at amortized that were transferred from Stage 3 to Stage 2 amounting 19,702 million pesos, result in an additional allowance for impairment losses of 559 million pesos. The change is not significant because “Lifetime PD” is used to determine the allowance for impairment losses for both stages. |
| ● | The change in the gross carrying amount of Loans and advances to customers – Financial assets at amortized that were transferred from Stage 3 to Stage 1 amounting 8,792 million pesos, result in a decrease in the allowance for impairment losses of 4,700 million pesos. The main driver of the change is the use of a twelve-month PD instead of a “Lifetime PD”. |
| ● | The gross carrying amount of financial instruments originated in 2020 that amounts to 622,049 million pesos, results in an increase in the allowance for impairment losses of 2,537 million pesos. |
d) Allowance for impairment losses
The changes in the allowance for impairment losses on Loans and advances to customers were as follows:
| | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Beginning balance as of January 1 (as originally presented) | | | (16,929) | | | (21,516) | | | (21,970) | | Adjustments on initial adoption of IFRS 9 | | | (3,270) | | | — | | | — | | Beginning balance as of January 1 (restated) | | | (20,199) | | | (21,516) | | | (21,970) | | | | | | | | | | | | | Impairment losses on financial assets - Financial assets at amortized cost (*) | | | (20,947) | | | (21,673) | | | (25,184) | | Impairment losses on financial assets - Financial assets at fair value through other comprehensive income | | | (2) | | | (5) | | | — | | Write-offs | | | 19,678 | | | 21,154 | | | 21,590 | | Others | | | (46) | | | 70 | | | 13 | | Balance at year-end | | | (21,516) | | | (21,970) | | | (25,551) | | | | | | | | | | | | | Of which: | | | | | | | | | | | By geographical location of risk: | | | | | | | | | | | Mexico | | | (21,516) | | | (21,970) | | | (25,551) | | | | | | | | | | | | |
(*)
| The amount of Impairment losses on financial assets not a fair value through profit or loss – Financial assets at amortized cost presented in the consolidated income statement is net of recoveries of loans previously written-off and recovery expenses in the amount of 2,141 million pesos in 2018, 2,083 million pesos in 2019 and 3,453 million pesos in 2020.
|
The post-model adjustments or overlays recognized within the allowance for impairment losses as of December 31, 2020, are as follows:
| | | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | IFRS 9 Model | | | Macroeconomic overlay | | | Impairment overlay | | | Total | | | Total Overlay to IFRS 9 Model | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | (24,093) | | | (613) | | | (845) | | | (25,551) | | | 6% | | Of which: | | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | (7,757) | | | (558) | | | (572) | | | (8,887) | | | 15% | | Public sector loans | | | (14) | | | (1) | | | — | | | (15) | | | 7% | | Mortgage loans | | | (4,108) | | | 30 | | | — | | | (4,078) | | | (1)% | | Installment loans to individuals - | | | (12,214) | | | (84) | | | (273) | | | (12,571) | | | 3% | | Revolving consumer credit card loans | | | (6,010) | | | (67) | | | (273) | | | (6,350) | | | 6% | | Non-revolving consumer loans | | | (6,204) | | | (17) | | | — | | | (6,221) | | | 0% | |
The following is a breakdown of the allowance for impairment losses and the write-offs as of December 31, 2020:
| | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Write-offs | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | (6,215) | | | (8,902) | | | (10,434) | | | (25,551) | | | (21,590) | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | (2,047) | | | (3,438) | | | (3,402) | | | (8,887) | | | (7,919) | Public sector loans | | | (15) | | | — | | | — | | | (15) | | | — | Mortgage loans | | | (625) | | | (824) | | | (2,629) | | | (4,078) | | | (1,145) | Installment loans to individuals - | | | (3,528) | | | (4,640) | | | (4,403) | | | (12,571) | | | (12,526) | Revolving consumer credit card loans | | | (1,526) | | | (2,837) | | | (1,987) | | | (6,350) | | | (7,020) | Non-revolving consumer loans | | | (2,002) | | | (1,803) | | | (2,416) | | | (6,221) | | | (5,506) | | | | | �� | | | | | | | | | | | |
The contractual amount outstanding of Loans and advances to customers written-off during 2020 that are still subject to enforcement activities, amounts to 21,863 million pesos.
The following is a breakdown of the transfers of the allowance for impairment losses of Loans and advances to customers between stages as of December 31, 2020:
| | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | Beginning balance as of January 1 | | | 7,254 | | | 5,466 | | | 9,250 | | | 21,970 | | | | | | | | | | | | | | As of January 1, 2020 | | | | | | | | | | | | | Transfers: | | | | | | | | | | | | | Transfer from Stage 1 to Stage 2 | | | 121 | | | (695) | | | — | | | (574) | Transfer from Stage 1 to Stage 3 | | | 24 | | | — | | | (101) | | | (77) | Transfer from Stage 2 to Stage 3 | | | — | | | 118 | | | (248) | | | (130) | Transfer from Stage 2 to Stage 1 | | | (412) | | | 5,129 | | | — | | | 4,717 | Transfer from Stage 3 to Stage 2 | | | — | | | (383) | | | 942 | | | 559 | Transfer from Stage 3 to Stage 1 | | | (347) | | | — | | | 5,047 | | | 4,700 | | | | | | | | | | | | | | Financial assets derecognized during the period other than write-offs | | | (7) | | | (8) | | | (47) | | | (62) | Contracts remaining at the same stage | | | (2,718) | | | (422) | | | 17,813 | | | 14,673 | Write-offs | | | — | | | — | | | (21,590) | | | (21,590) | Originated financial assets | | | 2,537 | | | — | | | — | | | 2,537 | Foreign exchange and other movements | | | (237) | | | (303) | | | (632) | | | (1,172) | | | | | | | | | | | | | | As of December 31, 2020 | | | 6,215 | | | 8,902 | | | 10,434 | | | 25,551 |
Post-model adjustments - overlays
The following is a breakdown by stages of the post-model adjustments or overlays recognized within the allowance for loan losses corresponding to Loans and advances to customers – Financial assets at amortized cost as of December 31, 2020:
| | | | | | | | | | | | | | | | Overlays | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | Macroeconomic overlay | | | (397) | | | (202) | | | (14) | | | (613) | | | | | | | | | | | | | | | | Impairment overlay | | | — | | | (819) | | | (26) | | | (845) | | | | | | | | | | | | | | | | Total | | | (397) | | | (1,021) | | | (40) | | | (1,458) | | | | | | | | | | | | | | | |
The breakdown by stages of the macroeconomic overlay recognized within the allowance for loan losses as of December 31, 2020 is as follows:
| | | | | | | | | | | | | | | | Macroeconomic overlay | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | Macroeconomic overlay | | | (397) | | | (202) | | | (14) | | | (613) | | Of which: | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | (374) | | | (176) | | | (8) | | | (558) | | Public sector loans | | | (1) | | | — | | | — | | | (1) | | Mortgage loans | | | 4 | | | 6 | | | 20 | | | 30 | | Installment loans to individuals - | | | (26) | | | (32) | | | (26) | | | (84) | | Revolving consumer credit card loans | | | (21) | | | (27) | | | (19) | | | (67) | | Non-revolving consumer loans | | | (5) | | | (5) | | | (7) | | | (17) | | | | | | | | | | | | | | | |
The breakdown by stages of the impairment overlay recognized within the allowance for loan losses as of December 31, 2020 is as follows:
| | | | | | | | | | | | | | | | Impairment overlay | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | Impairment overlay | | | — | | | (819) | | | (26) | | | (845) | | Of which: | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | — | | | (562) | | | (10) | | | (572) | | Installment to loans to individuals - | | | — | | | (257) | | | (16) | | | (273) | | Revolving consumer credit card loans | | | — | | | (257) | | | (16) | | | (273) | | | | | | | | | | | | | | | |
e) Impaired loans
The breakdown of the changes in the balance of Loans and advances to customers – Financial assets at amortized cost that are credit-impairedwere transferred from Stage 3 to Stage 2 amounting 5,390 million pesos, result in a decrease in the allowance for impairment losses of 1,293 million pesos. The change is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Beginning balance | | | 18,132 | | | 18,429 | | | 17,952 | | Additions | | | 32,461 | | | 31,418 | | | 37,216 | | Transfers to performing loans | | | (12,486) | | | (10,741) | | | (11,669) | | Written-off loans | | | (19,678) | | | (21,154) | | | (21,590) | | Balance at year-end | | | 18,429 | | | 17,952 | | | 21,909 | |
not significant because “Lifetime PD” is used to determine the allowance for impairment losses for both stages. |
| ● | The breakdown between no past due and past due as of December 31, 2019 ofchange in the balancegross carrying amount of Loans and advances to customers – Financial assets at amortized cost that are consideredwere transferred from Stage 3 to be credit-impaired is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | With Balances Past Due by | | | | With no Past | | | | | | | | | | | | | | | | | | | Due Balances | | | | | | | | | | | | | | | | | | | or Less than 3 | | | | | | | | | | | | | | | | | | | Months Past | | | | | | | | | | | | More than 12 | | | | | | | Due | | | 3 to 6 Months | | | 6 to 9 Months | | | 9 to 12 Months | | | Months | | | Total | | | | | | | | | | | | | | | | | | | | By type of loan: | | | | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 1,427 | | | 1,640 | | | 404 | | | 291 | | | 2,053 | | | 5,815 | Mortgage loans | | | 3,701 | | | 1,142 | | | 703 | | | 498 | | | 2,355 | | | 8,399 | Installment loans to individuals | | | | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | | | | Revolving consumer credit card loans | | | 536 | | | 1,181 | | | — | | | — | | | — | | | 1,717 | Non-revolving consumer loans | | | 527 | | | 1,492 | | | 1 | | | — | | | 1 | | | 2,021 | | | | 6,191 | | | 5,455 | | | 1,108 | | | 789 | | | 4,409 | | | 17,952 |
67 million pesos. The breakdown between no past due and past due as of December 31, 2020main driver of the balancechange is the use of Loans and advancesa twelve-month PD instead of a “Lifetime PD”. |
| ● | The gross carrying amount of financial instruments originated in 2022 that amounts to customers – Financial327,309 million pesos, results in an increase in the allowance for impairment losses of 3,185 million pesos. |
d) Allowance for impairment losses The changes in the allowance for impairment losses on Loans and advances to customers were as follows: | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Beginning balance as of January 1 | | | (21,970) | | | (25,551) | | | (21,035) | | | | | | | | | | | | | Impairment losses on financial assets at amortized cost (*) | | | (25,184) | | | (21,949) | | | (19,782) | | Impairment losses on financial assets at fair value through other comprehensive income | | | — | | | (7) | | | — | | Write-offs | | | 21,590 | | | 26,477 | | | 19,169 | | Others | | | 13 | | | (5) | | | (4) | | Balance at year-end | | | (25,551) | | | (21,035) | | | (21,652) | | | | | | | | | | | | | Of which: | | | | | | | | | | | By geographical location of risk: | | | | | | | | | | | Mexico | | | (25,551) | | | (21,035) | | | (21,652) | | | | | | | | | | | | |
(*) | The amount of Impairment losses on financial assets at amortized cost that are considered to be credit-impaired,presented in the consolidated income statement is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | With Balances Past Due by | | | | With no Past | | | | | | | | | | | | | | | | | | | Due Balances | | | | | | | | | | | | | | | | | | | or Less than 3 | | | | | | | | | | | | | | | | | | | Months Past | | | | | | | | | | | | More than 12 | | | | | | | Due | | | 3 to 6 Months | | | 6 to 9 Months | | | 9 to 12 Months | | | Months | | | Total | | | | | | | | | | | | | | | | | | | | By type of loan: | | | | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 2,324 | | | 3,310 | | | 326 | | | 196 | | | 374 | | | 6,530 | Mortgage loans | | | 1,982 | | | 2,097 | | | 741 | | | 1,084 | | | 3,943 | | | 9,847 | Installment loans to individuals | | | | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | | | | Revolving consumer credit card loans | | | 868 | | | 1,675 | | | — | | | — | | | — | | | 2,543 | Non-revolving consumer loans | | | 474 | | | 2,515 | | | — | | | — | | | — | | | 2,989 | | | | 5,648 | | | 9,597 | | | 1,067 | | | 1,280 | | | 4,317 | | | 21,909 |
f) Renegotiated loans
The Bank sometimes makes concessions or modifications to the original termsnet of recoveries of loans as a response to the customer’s financial difficulties, rather than taking possession or to enforce otherwise collection of collateral.
Renegotiated loans include restructured or refinancing transactions of performing loanspreviously written-off and credit-impaired loans, as contractual terms of a loan may be modified due to not only concerns about the customer’s ability to meet contractual payments, but also for customer retention purposes and other factors not related to current or potential credit deterioration of the customer.
A restructured transaction is a transaction with respect to which, for economic or legal reasons relating to current or foreseeable financial difficulties of the customer, the financial terms and conditions are modified in order to facilitate the payment of the debt (principal and interest) because the customer is unable, or might foreseeably become unable, to comply with the aforementioned terms and conditions in due time and form, even if such modification is envisagedrecovery expenses in the agreement.
A refinancing transaction is a transaction that is granted or used, for reasons relating to current or foreseeable financial difficultiesamount of the customer, to repay one or more of the transactions granted to it, or through which the payments on such transactions are brought fully or partially up to date,3,453 million pesos in order to enable the customers of the cancelled or refinanced transactions to repay their debt (principal2020, 2,720 million pesos in 2021 and interest)
because they are unable, or might foreseeably become unable, to comply with the conditions thereof3,699 million pesos in due time and form.2022.
A breakdown of renegotiated loans during the years ended December 31, 2018, 2019 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended 12/31/2018 | | | For the Year Ended 12/31/2019 | | | For the Year Ended 12/31/2020 | | | | | Performing loans | | | | | | | | | Performing loans | | | | | | | | | Performing loans | | | | | | | | | | | Due to | | | | | | | | | | | | Due to | | | | | | | | | | | | Due to | | | | | | | | | | | | | | Concerns | | | | | | | | | | | | Concerns | | | | | | | | | | | | Concerns | | | | | | | | | | | | | | About | | | | | | | | | | | | About | | | | | | | | | | | | About | | | | | | | | | | | | | | Current or | | | | | | | | | | | | Current or | | | | | | | | | | | | Current or | | | | | | | | | | | | | | Potential | | | Due to | | | | | | | | | Potential | | | Due to | | | | | | | | | Potential | | | Due to | | | | | | | | | | | Credit | | | Other | | | Impaired | | | | | | Credit | | | Other | | | Impaired | | | | | | Credit | | | Other | | | Impaired | | | | | | | | Deterioration | | | Factors | | | Loans | | | Total | | | Deterioration | | | Factors | | | Loans | | | Total | | | Deterioration | | | Factors | | | Loans | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 1,318 | | | — | | | 3,011 | | | 4,329 | | | 1,215 | | | — | | | 2,318 | | | 3,533 | | | 2,158 | | | — | | | 912 | | | 3,070 | | Mortgage loans | | | 603 | | | — | | | 530 | | | 1,133 | | | 369 | | | — | | | 293 | | | 662 | | | 356 | | | — | | | 329 | | | 685 | | Installment loans to individuals | | | 1,147 | | | — | | | 205 | | | 1,352 | | | 850 | | | — | | | 306 | | | 1,156 | | | 1,627 | | | — | | | 272 | | | 1,899 | | | | | 3,068 | | | — | | | 3,746 | | | 6,814 | | | 2,434 | | | — | | | 2,917 | | | 5,351 | | | 4,141 | | | — | | | 1,513 | | | 5,654 | | Percentage | | | 45 | % | | — | | | 55 | % | | 100 | % | | 45 | % | | — | | | 55 | % | | 100 | % | | 73 | % | | — | | | 27 | % | | 100 | % |
Credit-impaired loans that are renegotiated continue to be classified as impaired loans until the sustained payment criteria and other considerations are reached as described in Note 2.g.
The types of terms that are typically renegotiated include: (a) modifications to the contractual terms of loans, such as payment terms, interest rates and currency, or (b) modifications to the guarantees that cover the loans.
See Note 48 b) 4.7 Recovery and collections management for additional information regarding renegotiated loans.
g) Modification on financial instruments in the context of COVID-19 pandemic
|
The post-model adjustments or overlays recognized within the allowance for impairment losses as of December 31, 2020, are as follows: | | | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | IFRS 9 Model | | | Macroeconomic overlay | | | Impairment overlay | | | Total | | | Total Overlay to IFRS 9 Model | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | (24,093) | | | (613) | | | (845) | | | (25,551) | | | 6% | | Of which: | | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | (7,757) | | | (558) | | | (572) | | | (8,887) | | | 15% | | Public sector loans | | | (14) | | | (1) | | | — | | | (15) | | | 7% | | Mortgage loans | | | (4,108) | | | 30 | | | — | | | (4,078) | | | (1)% | | Installment loans to individuals - | | | (12,214) | | | (84) | | | (273) | | | (12,571) | | | 3% | | Revolving consumer credit card loans | | | (6,010) | | | (67) | | | (273) | | | (6,350) | | | 6% | | Non-revolving consumer loans | | | (6,204) | | | (17) | | | — | | | (6,221) | | | 0% | |
During 2021, the macroeconomic and impairment overlays were consumed or reversed; accordingly, there are no post-model adjustments or overlays as of December 31, 2021. The following is a breakdown of the allowance for impairment losses and the write-offs as of December 31, 2021: | | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Write-offs | | | | | | | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | (7) | | | — | | | — | | | (7) | | | — | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | (5,764) | | | (5,149) | | | (10,115) | | | (21,028) | | | (26,477) | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | (1,715) | | | (1,509) | | | (4,899) | | | (8,123) | | | (9,259) | Public sector loans | | | (66) | | | — | | | (58) | | | (124) | | | — | Mortgage loans | | | (640) | | | (991) | | | (2,873) | | | (4,504) | | | (1,572) | Installment loans to individuals - | | | (3,343) | | | (2,649) | | | (2,285) | | | (8,277) | | | (15,646) | Revolving consumer credit card loans | | | (1,498) | | | (1,338) | | | (1,016) | | | (3,852) | | | (8,396) | Non-revolving consumer loans | | | (1,845) | | | (1,311) | | | (1,269) | | | (4,425) | | | (7,250) | | | | | | | | | | | | | | | | |
The following is a breakdown of the allowance for impairment losses and the write-offs as of December 31, 2022: | | | | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Write-offs | | | | | | | | | | | | | | | | | Financial assets at amortized cost | | | (7,013) | | | (6,541) | | | (8,098) | | | (21,652) | | | (19,169) | Of which: | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | (1,377) | | | (1,385) | | | (2,769) | | | (5,531) | | | (5,130) | Public sector loans | | | (38) | | | — | | | — | | | (38) | | | — | Mortgage loans | | | (676) | | | (809) | | | (2,749) | | | (4,234) | | | (2,894) | Installment loans to individuals - | | | (4,922) | | | (4,347) | | | (2,580) | | | (11,849) | | | (11,145) | Revolving consumer credit card loans | | | (2,020) | | | (2,060) | | | (780) | | | (4,860) | | | (5,670) | Non-revolving consumer loans | | | (2,902) | | | (2,287) | | | (1,800) | | | (6,989) | | | (5,475) | | | | | | | | | | | | | | | | |
The contractual amount outstanding of Loans and advances to customers written-off during 2022 that are still subject to enforcement activities, amounts to 19,169 million pesos. The following is a breakdown of the transfers of the allowance for impairment losses of Loans and advances to customers between stages as of December 31, 2021: | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | Beginning balance as of January 1 | | | 6,215 | | | 8,902 | | | 10,434 | | | 25,551 | �� | | | | | | | | | | | | | As of January 1, 2021 | | | | | | | | | | | | | Transfers: | | | | | | | | | | | | | Transfer from Stage 1 to Stage 2 | | | (346) | | | 2,211 | | | — | | | 1,865 | Transfer from Stage 1 to Stage 3 | | | (183) | | | — | | | 2,977 | | | 2,794 | Transfer from Stage 2 to Stage 3 | | | — | | | (712) | | | 2,636 | | | 1,924 | Transfer from Stage 2 to Stage 1 | | | 387 | | | (1,976) | | | — | | | (1,589) | Transfer from Stage 3 to Stage 2 | | | — | | | 332 | | | (443) | | | (111) | Transfer from Stage 3 to Stage 1 | | | 34 | | | — | | | (113) | | | (79) | | | | | | | | | | | | | | Financial assets derecognized during the period other than write-offs | | | (906) | | | 1,087 | | | 2,930 | | | 3,111 | Contracts remaining at the same stage | | | (1,986) | | | (4,767) | | | 17,921 | | | 11,168 | Write-offs | | | — | | | — | | | (26,477) | | | (26,477) | Originated financial assets | | | 2,741 | | | — | | | — | | | 2,741 | Foreign exchange and other movements | | | (185) | | | 72 | | | 250 | | | 137 | | | | | | | | | | | | | | As of December 31, 2021 | | | 5,771 | | | 5,149 | | | 10,115 | | | 21,035 |
The following is a breakdown of the transfers of the allowance for impairment losses of Loans and advances to customers between stages as of December 31, 2022: | | | | | | | | | | | | | | | Allowance for impairment losses | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | Beginning balance as of January 1 | | | 5,771 | | | 5,149 | | | 10,115 | | | 21,035 | | | | | | | | | | | | | | As of January 1, 2022 | | | | | | | | | | | | | Transfers: | | | | | | | | | | | | | Transfer from Stage 1 to Stage 2 | | | (511) | | | 3,409 | | | — | | | 2,898 | Transfer from Stage 1 to Stage 3 | | | (257) | | | — | | | 2,800 | | | 2,543 | Transfer from Stage 2 to Stage 3 | | | — | | | (980) | | | 1,620 | | | 640 | Transfer from Stage 2 to Stage 1 | | | 90 | | | (527) | | | — | | | (437) | Transfer from Stage 3 to Stage 2 | | | — | | | 277 | | | (1,570) | | | (1,293) | Transfer from Stage 3 to Stage 1 | | | 20 | | | — | | | (87) | | | (67) | | | | | | | | | | | | | | Financial assets derecognized during the period other than write-offs | | | (1,203) | | | (534) | | | 9,807 | | | 8,070 | Contracts remaining at the same stage | | | (121) | | | (282) | | | 4,582 | | | 4,179 | Write-offs | | | — | | | — | | | (19,169) | | | (19,169) | Originated financial assets | | | 3,185 | | | — | | | — | | | 3,185 | Foreign exchange and other movements | | | 39 | | | 29 | | | — | | | 68 | | | | | | | | | | | | | | As of December 31, 2022 | | | 7,013 | | | 6,541 | | | 8,098 | | | 21,652 |
e) Impaired loans The breakdown of the changes in the balance of Loans and advances to customers – Financial assets at amortized cost that are credit-impaired is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Beginning balance | | | 17,952 | | | 21,909 | | | 22,653 | | Additions | | | 37,216 | | | 32,526 | | | 27,001 | | Transfers to performing loans | | | (11,669) | | | (5,305) | | | (9,282) | | Written-off loans | | | (21,590) | | | (26,477) | | | (19,169) | | Balance at year-end | | | 21,909 | | | 22,653 | | | 21,203 | |
The breakdown between no past due and past due as of December 31, 2021 of the balance of Loans and advances to customers – Financial assets at amortized cost that are considered to be credit-impaired is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | With Balances Past Due by | | | | With no Past | | | | | | | | | | | | | | | | | | | Due Balances | | | | | | | | | | | | | | | | | | | or Less than 3 | | | | | | | | | | | | | | | | | | | Months Past | | | | | | | | | | | | More than 12 | | | | | | | Due | | | 3 to 6 Months | | | 6 to 9 Months | | | 9 to 12 Months | | | Months | | | Total | | | | | | | | | | | | | | | | | | | | By type of loan: | | | | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 6,689 | | | 1,434 | | | 676 | | | 808 | | | 330 | | | 9,937 | Mortgage loans | | | 2,194 | | | 1,764 | | | 965 | | | 751 | | | 4,051 | | | 9,725 | Installment loans to individuals | | | | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | | | | Revolving consumer credit card loans | | | 451 | | | 877 | | | — | | | — | | | — | | | 1,328 | Non-revolving consumer loans | | | 414 | | | 1,243 | | | 5 | | | 1 | | | — | | | 1,663 | | | | 9,748 | | | 5,318 | | | 1,646 | | | 1,560 | | | 4,381 | | | 22,653 |
The breakdown between no past due and past due as of December 31, 2022 of the balance of Loans and advances to customers – Financial assets at amortized cost that are considered to be credit-impaired, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | With Balances Past Due by | | | | With no Past | | | | | | | | | | | | | | | | | | | Due Balances | | | | | | | | | | | | | | | | | | | or Less than 3 | | | | | | | | | | | | | | | | | | | Months Past | | | | | | | | | | | | More than 12 | | | | | | | Due | | | 3 to 6 Months | | | 6 to 9 Months | | | 9 to 12 Months | | | Months | | | Total | | | | | | | | | | | | | | | | | | | | By type of loan: | | | | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 3,691 | | | 1,470 | | | 156 | | | 46 | | | 224 | | | 5,587 | Mortgage loans | | | 5,793 | | | 1,705 | | | 669 | | | 581 | | | 3,119 | | | 11,867 | Installment loans to individuals | | | | | | | | | | | | | | | | | | | Of which: | | | | | | | | | | | | | | | | | | | Revolving consumer credit card loans | | | 614 | | | 561 | | | — | | | — | | | — | | | 1,175 | Non-revolving consumer loans | | | 1,086 | | | 1,487 | | | 1 | | | — | | | — | | | 2,574 | | | | 11,184 | | | 5,223 | | | 826 | | | 627 | | | 3,343 | | | 21,203 |
f) Renegotiated loans The Bank sometimes makes concessions or modifications to the original terms of loans as a response to the customer’s financial difficulties, rather than taking possession or to enforce otherwise collection of collateral. Renegotiated loans include restructured or refinancing transactions of performing loans and credit-impaired loans, as contractual terms of a loan may be modified due to not only concerns about the customer’s ability to meet contractual payments, but also for customer retention purposes and other factors not related to current or potential credit deterioration of the customer. A restructured transaction is a transaction with respect to which, for economic or legal reasons relating to current or foreseeable financial difficulties of the customer, the financial terms and conditions are modified in order to facilitate the payment of the debt (principal and interest) because the customer is unable, or might foreseeably become unable, to comply with the aforementioned terms and conditions in due time and form, even if such modification is envisaged in the agreement. A refinancing transaction is a transaction that is granted or used, for reasons relating to current or foreseeable financial difficulties of the customer, to repay one or more of the transactions granted to it, or through which the payments on such transactions are brought fully or partially up to date, in order to enable the customers of the cancelled or refinanced transactions to repay their debt (principal and interest) because they are unable, or might foreseeably become unable, to comply with the conditions thereof in due time and form. A breakdown of renegotiated loans during the years ended December 31, 2020, 2021 and 2022 is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended 12/31/2020 | | | For the Year Ended 12/31/2021 | | | For the Year Ended 12/31/2022 | | | | | Performing loans | | | | | | | | | Performing loans | | | | | | | | | Performing loans | | | | | | | | | | | Due to | | | | | | | | | | | | Due to | | | | | | | | | | | | Due to | | | | | | | | | | | | | | Concerns | | | | | | | | | | | | Concerns | | | | | | | | | | | | Concerns | | | | | | | | | | | | | | About | | | | | | | | | | | | About | | | | | | | | | | | | About | | | | | | | | | | | | | | Current or | | | | | | | | | | | | Current or | | | | | | | | | | | | Current or | | | | | | | | | | | | | | Potential | | | Due to | | | | | | | | | Potential | | | Due to | | | | | | | | | Potential | | | Due to | | | | | | | | | | | Credit | | | Other | | | Impaired | | | | | | Credit | | | Other | | | Impaired | | | | | | Credit | | | Other | | | Impaired | | | | | | | | Deterioration | | | Factors | | | Loans | | | Total | | | Deterioration | | | Factors | | | Loans | | | Total | | | Deterioration | | | Factors | | | Loans | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial, financial and industrial loans | | | 2,158 | | | — | | | 912 | | | 3,070 | | | 5,918 | | | — | | | 4,299 | | | 10,217 | | | 7,978 | | | — | | | 2,549 | | | 10,527 | | Mortgage loans | | | 356 | | | — | | | 329 | | | 685 | | | 217 | | | — | | | 356 | | | 573 | | | 159 | | | — | | | 157 | | | 316 | | Installment loans to individuals | | | 1,627 | | | — | | | 272 | | | 1,899 | | | 380 | | | — | | | 1,183 | | | 1,563 | | | 977 | | | — | | | 510 | | | 1,487 | | | | | 4,141 | | | — | | | 1,513 | | | 5,654 | | | 6,515 | | | — | | | 5,838 | | | 12,353 | | | 9,114 | | | — | | | 3,216 | | | 12,330 | | Percentage | | | 73 | % | | — | | | 27 | % | | 100 | % | | 53 | % | | — | | | 47 | % | | 100 | % | | 74 | % | | — | | | 26 | % | | 100 | % |
Credit-impaired loans that are renegotiated continue to be classified as impaired loans until the sustained payment criteria and other considerations are reached as described in Note 2.g. The types of terms that are typically renegotiated include: (a) modifications to the contractual terms of loans, such as payment terms, interest rates and currency, or (b) modifications to the guarantees that cover the loans. See Note 48 b) 1.7 Recovery and collections management for additional information regarding renegotiated loans. g) Modification on financial instruments in the context of COVID-19 pandemic During 2020, the relief measures contained in the Support Program resulted in a modification to the contractual terms of the loans subject to the Support Program, that did not result in derecognition of the financial assets under IFRS 9. The breakdown of Gains/(losses) on modification of financial assets (net) recognized in the consolidated income statement as of December 31, 2020 is as follows: | | | | | |
|
| 2020 |
| | | | | | Commercial, financial and industrial loans | | | (605) | | Mortgage loans | | | (224) | | Installment loans to individuals - | | | | | Non-revolving consumer loans | | | (914) | | | |
| (1,743) | |
h) Maximum exposure to credit risk and credit quality information Maximum exposure to credit risk The tables below represent the Bank’s maximum exposure to credit risk by class of financial instrument (except for hedging financial derivatives) and the respective collateral and other credit enhancements mitigating credit risk for these classes of financial instruments. The maximum exposure to credit risk includes the carrying amounts of financial instruments recognized in the consolidated balance sheet subject to credit risk and the nominal amounts for off-balance sheet commitments. Where available, collaterals are presented at fair value; for other collaterals, such as real estate and other assets, best estimates of fair value are used. Other credit enhancements such as guarantees are included at their nominal amounts. Collateral or guarantees are credit enhancements in the form of an asset or third-party obligation that serve to mitigate the inherent risk of credit loss in an exposure, by either substituting the borrower default risk or improving recoveries in the event of a default. The Bank’s collateral or guarantees are contractual and are typically classified as follows: | ● | Financial and other collateral, which enables the Bank to recover all or part of the outstanding exposure by liquidating the collateral asset provided in cases where the borrower is unable or unwilling to fulfill its primary obligations. Cash collateral, securities (debt or equity instruments), collection rights, inventory, equipment and real estate are included in this category: |
| - | Cash collateral received - cash collateral requested from financial and corporate customers to secure the payments in OTC financial derivatives transactions. |
| - | Collateralized by securities - collateral to secure the payments in repurchase agreements and reverse repurchase agreements transactions. |
| - | Collection rights - highly liquid and realizable guarantees, which are mainly comprised of standby letters and pledges on funds and securities. |
| ● | Guarantees, which complement the customer’s ability to fulfill its obligation under the legal contract and, as such, is provided by third parties in the form of individual guarantee by endorsement or co-signers, where individuals or companies act as guarantors of the loan transaction. |
Collaterals and other credit enhancements related to the commercial loan portfolio are subject to at least an annual review. In the case of guarantees, the guarantor’s ability to perform under the guarantee contract is reviewed through an analysis of the financial position of the customer and the guarantor. There are cases where the Bank has attempted to seek recovery through the execution of a third-party guarantee and has been denied such recovery. Please see Note 2.g for an explanation of how the credit ratings of guarantors affect our allowance for impairment losses. For the retail loan portfolio, a review of its collaterals and other credit enhancements is performed on a periodic basis depending on the history of the payment performance of the borrower. For the real estate collaterals, appraisals are obtained as of the date of origination of the loans and when the loan is classified as impaired. See Note 48.b) 4.3 Credit risk mitigation techniques, for additional information regarding credit risk mitigation. The breakdown is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2021 | | | | | | | Maximum Exposure | | | | | | | | | | | | | | | | | | | Maximum | | | to Credit Risk (1) | | | Collaterals | | | Other Credit Enhancements | | | | Exposure to | | | | | | | | | Cash Collateral | | | Collateralized by | | | | | | | | | | | | | Credit Risk | | | Unsecured | | | Secured | | | Received | | | Securities | | | Collection Rights (3) | | | Real Estate (2) | | | Guarantees | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through profit or loss | | | 290,365 | | | 195,268 | | | 95,097 | | | 26,919 | | | 68,178 | | | — | | | — | | | — | Financial assets at fair value through other comprehensive income | | | 390,974 | | | 390,974 | | | — | | | — | | | — | | | — | | | — | | | — | Financial assets at amortized cost: | | | 758,025 | | | 222,505 | | | 535,520 | | | — | | | — | | | 90,584 | | | 200,815 | | | 15,039 | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Loans and advances to customers | | | 758,025 | | | 222,505 | | | 535,520 | | | — | | | — | | | 90,584 | | | 200,815 | | | 15,039 | Commercial, financial and industrial loans | | | 350,491 | | | 88,047 | | | 262,444 | | | — | | | — | | | 53,290 | | | 21,136 | | | 15,039 | Public sector loans | | | 85,256 | | | 27,762 | | | 57,494 | | | — | | | — | | | 34,763 | | | — | | | — | Mortgage loans | | | 199,579 | | | 2,290 | | | 197,289 | | | — | | | — | | | 2,501 | | | 161,422 | | | — | Installment loans to individuals: | | | | | | | | | | | | | | | | | | | | | | | | | Revolving consumer credit card loans | | | 53,417 | | | 53,417 | | | — | | | — | | | — | | | — | | | — | | | — | Non-revolving consumer loans | | | 69,282 | | | 50,989 | | | 18,293 | | | — | | | — | | | 30 | | | 18,257 | | | — | Debt instruments | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Guarantees and loan commitments | | | 91,329 | | | 91,329 | | | — | | | — | | | — | | | — | | | — | | | — | | | | 1,530,693 | | | 900,076 | | | 630,617 | | | 26,919 | | | 68,178 | | | 90,584 | | | 200,815 | | | 15,039 |
| (1) | Correspond to loans and advances to customers and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total collaterals and other credit enhancements as certain loans and advances to customers are secured by multiple credit enhancements. |
| (2) | Appraisals to support estimated fair value of the real estate collaterals are obtained at loan origination. |
| (3) | Public sector loan rights are guaranteed by Mexican government entities. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2022 | | | | | | | Maximum Exposure | | | | | | | | | | | | | | | | | | | Maximum | | | to Credit Risk (1) | | | Collaterals | | | Other Credit Enhancements | | | | Exposure to | | | | | | | | | Cash Collateral | | | Collateralized by | | | | | | | | | | | | | Credit Risk | | | Unsecured | | | Secured | | | Received | | | Securities | | | Collection Rights (3) | | | Real Estate (2) | | | Guarantees | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through profit or loss | | | 359,065 | | | 208,265 | | | 150,800 | | | 26,861 | | | 123,939 | | | — | | | — | | | — | Financial assets at fair value through other comprehensive income | | | 313,906 | | | 313,906 | | | — | | | — | | | — | | | — | | | — | | | — | Financial assets at amortized cost: | | | — | | | — | | | — | | | — | | | — | | | 15,391 | | | 319,879 | | | 3,290 | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Loans and advances to customers | | | — | | | — | | | — | | | — | | | — | | | 15,391 | | | 319,879 | | | 3,290 | Commercial, financial and industrial loans | | | 366,710 | | | 86,996 | | | 279,714 | | | — | | | — | | | 11,617 | | | 86,858 | | | 3,155 | Public sector loans | | | 84,583 | | | 21,785 | | | 62,798 | | | — | | | — | | | — | | | - | | | — | Mortgage loans | | | 217,109 | | | 2,586 | | | 214,523 | | | — | | | — | | | — | | | — | | | — | Installment loans to individuals: | | | | | | | | | | | | | | | | | | | | | | | | | Revolving consumer credit card loans | | | 64,957 | | | 64,957 | | | — | | | — | | | — | | | — | | | — | | | — | Non-revolving consumer loans | | | 86,009 | | | 60,359 | | | 25,650 | | | — | | | — | | | 3,774 | | | 233,021 | | | 135 | Debt instruments | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Guarantees and loan commitments | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 672,971 | | | 522,171 | | | 150,800 | | | 26,861 | | | 123,939 | | | 15,391 | | | 319,879 | | | 3,290 |
| (1) | Correspond to loans and advances to customers and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total collaterals and other credit enhancements as certain loans and advances to customers are secured by multiple credit enhancements. |
| (2) | Appraisals to support estimated fair value of the real estate collaterals are obtained at loan origination. |
| (3) | Public sector loan rights are guaranteed by Mexican government entities. |
Credit quality information For commercial loans (except small and medium-sized enterprises or SME) and public sector loans, in order to achieve equivalent internal ratings in the different models available and to make them comparable with the external ratings of rating agencies, the Bank has developed a master rating scale. The equivalence is established through the PD associated with each rating. “Internally calibrated PDs” are compared against the default rates associated with the external ratings, which are published periodically by rating agencies. The internal rating scale and mapping with external ratings are as follows: | | | | | | | | | | Equivalence with | |
|
| Standard & |
|
| | Internal Rating | |
| Poor’s | |
| Moody’s | | | | | | | | 9.3 | | | Aaa | | | AAA | 9.2 | | | Aa1 | | | AA+ | 9.0 | | | Aa2 | | | AA | 8.6 | | | Aa3 | | | AA- | 8.1 | | | A1 | | | A+ | 7.7 | | | A2 | | | A | 7.3 | | | A3 | | | A- | 6.7 | | | Baa1 | | | BBB+ | 6.1 | | | Baa2 | | | BBB | 5.6 | | | Baa3 | | | BBB- | 5.0 | | | Ba1 | | | BB+ | 4.4 | | | Ba2 | | | BB | 3.9 | | | Ba3 | | | BB- | 3.3 | | | B1 | | | B+ | 2.7 | | | B2 | | | B | 2.2 | | | B3 | | | B- | 1.6 | | | Caa1 | | | CCC | 1.0 | | | Ca | | | CC |
For commercial loans to small and medium-sized enterprises (SME), mortgage loans and installment loans to individuals (revolving credit card consumer loans and non-revolving consumer loans), expected credit losses are calculated using statistical methods without considering internal ratings. However, based on criteria set forth by the CNBV and a combination of internal scorecards, customer’s financial information and qualitative criteria, ratings are assigned as follows: | | | | | | | | Rating |
|
| Equivalence | | | | | A-1 | | | Minimum Risk (Solid) | A-2 | | | Low Risk (Outstanding) | B-1 | | | Normal Risk (Good) | B-2 | | | Normal Risk | B-3 | | | Satisfactory | C-1 | | | Normal Risk (Adequate) | C-2 | | | Medium Risk (Weak) | D | | | High Risk (Poor) | E | | | Probable Loss |
Credit quality information by rating category The tables below represent the classification by rating category of commercial loans (except SME) and public sector loans and their related guarantees and loan commitments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Not | | | Rating Category | | 9.3 | | 9.2 | | 9.0 | | 8.5 | | 8.0 | | 7.5 | | 7.0 | | 6.5 | | 6.0 | | 5.5 | | 5.0 | | 4.5 | | 4.0 | | 3.5 | | 3.0 | | 2.5 | | 2.0 | | 1.5 | | 1.0 | | Rated | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans (except SME) | | — | | — | | — | | — | | — | | 1,623 | | 11,593 | | 31,990 | | 39,440 | | 72,625 | | 79,781 | | 25,216 | | 8,934 | | 5,643 | | 2,361 | | 386 | | 1,041 | | 118 | | 101 | | 14,391 | | 295,243 | Public sector loans | | — | | — | | — | | — | | — | | — | | 9,069 | | 20,912 | | 4,877 | | 7,600 | | 37,876 | | 4,862 | | — | | — | | 67 | | — | | — | | — | | — | | — | | 85,263 | | | — | | — | | — | | — | | — | | 1,623 | | 20,662 | | 52,902 | | 44,317 | | 80,225 | | 117,657 | | 30,078 | | 8,934 | | 5,643 | | 2,428 | | 386 | | 1,041 | | 118 | | 101 | | 14,391 | | 380,506 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Guarantees | | 518 | | — | | — | | 2,940 | | 14,668 | | 3,521 | | 8,066 | | 13,690 | | 7,372 | | 2,621 | | 1,744 | | 72 | | 878 | | 4 | | — | | — | | — | | — | | — | | 829 | | 56,923 | Loan commitments | | — | | — | | — | | 1 | | 863 | | 186 | | 29 | | 297 | | 3,795 | | 10,579 | | 6,352 | | 826 | | 3 | | 1,021 | | 62 | | — | | 23 | | — | | — | | 494 | | 24,531 | | | 518 | | — | | — | | 2,941 | | 15,531 | | 3,707 | | 8,095 | | 13,987 | | 11,167 | | 13,200 | | 8,096 | | 898 | | 881 | | 1,025 | | 62 | | — | | 23 | | — | | — | | 1,323 | | 81,454 | | | 518 | | — | | — | | 2,941 | | 15,531 | | 5,330 | | 28,757 | | 66,889 | | 55,484 | | 93,425 | | 125,753 | | 30,976 | | 9,815 | | 6,668 | | 2,490 | | 386 | | 1,064 | | 118 | | 101 | | 15,714 | | 461,960 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Not | | | Rating Category | | 9.3 | | 9.2 | | 9.0 | | 8.5 | | 8.0 | | 7.5 | | 7.0 | | 6.5 | | 6.0 | | 5.5 | | 5.0 | | 4.5 | | 4.0 | | 3.5 | | 3.0 | | 2.5 | | 2.0 | | 1.5 | | 1.0 | | Rated | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans (except SME) | | — | | — | | — | | — | | 17 | | 8,898 | | 46,807 | | 42,193 | | 44,885 | | 69,468 | | 48,240 | | 19,490 | | 7,577 | | 6,688 | | 7,152 | | 1,237 | | 1,079 | | 195 | | 588 | | 9,825 | | 314,339 | Public sector loans | | — | | — | | — | | — | | — | | — | | 13,995 | | 18,495 | | 9,296 | | 3,673 | | 34,351 | | 1,761 | | 3,013 | | — | | — | | — | | — | | — | | — | | — | | 84,584 | | | — | | — | | — | | — | | 17 | | 8,898 | | 60,802 | | 60,688 | | 54,181 | | 73,141 | | 82,591 | | 21,251 | | 10,590 | | 6,688 | | 7,152 | | 1,237 | | 1,079 | | 195 | | 588 | | 9,825 | | 398,923 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Guarantees | | 493 | | — | | — | | 2,738 | | 16,668 | | 12,789 | | 10,067 | | 16,796 | | 6,529 | | 3,046 | | 1,194 | | 4,020 | | — | | — | | — | | 500 | | 3 | | — | | — | | 475 | | 75,318 | Loan commitments | | — | | — | | — | | 38 | | 1,078 | | 415 | | 1,229 | | 8,754 | | 7,488 | | 3,519 | | 1,667 | | 1,430 | | 164 | | 60 | | 674 | | 15 | | — | | 2 | | 623 | | 503 | | 27,659 | | | 493 | | — | | — | | 2,776 | | 17,746 | | 13,204 | | 11,296 | | 25,550 | | 14,017 | | 6,565 | | 2,861 | | 5,450 | | 164 | | 60 | | 674 | | 515 | | 3 | | 2 | | 623 | | 978 | | 102,977 | | | 493 | | — | | — | | 2,776 | | 17,763 | | 22,102 | | 72,098 | | 86,238 | | 68,198 | | 79,706 | | 85,452 | | 26,701 | | 10,754 | | 6,748 | | 7,826 | | 1,752 | | 1,082 | | 197 | | 1,211 | | 10,803 | | 501,900 |
The tables below represent the classification by rating category of commercial loans (SME), mortgage loans, revolving consumer credit card loans and non-revolving consumer loans and their related commitments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2021 | Rating Category | | | A-1 | | | A-2 | | | B-1 | | | B-2 | | | B-3 | | | C-1 | | | C-2 | | | D | | | E | | | Not Rated | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans (SME) | | | 42,503 | | | 4,625 | | | 1,280 | | | 1,216 | | | 2,216 | | | 1,140 | | | 626 | | | 1,784 | | | 494 | | | — | | | 55,884 | Mortgage loans | | | 142,698 | | | 7,628 | | | 6,759 | | | 14,994 | | | 2,071 | | | 5,031 | | | 5,815 | | | 5,297 | | | 3,548 | | | — | | | 193,841 | Revolving consumer credit card loans | | | 15,144 | | | 19,831 | | | 6,711 | | | 1,939 | | | 1,419 | | | 2,653 | | | 2,260 | | | 2,388 | | | 1,061 | | | — | | | 53,406 | Non-revolving consumer loans | | | 25,365 | | | 5,316 | | | 18,785 | | | 7,352 | | | 3,599 | | | 2,262 | | | 2,135 | | | 889 | | | 2,701 | | | — | | | 68,404 | | | | 225,710 | | | 37,400 | | | 33,535 | | | 25,501 | | | 9,305 | | | 11,086 | | | 10,836 | | | 10,358 | | | 7,804 | | | — | | | 371,535 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 45,805 | | | 9,709 | | | 1,938 | | | 832 | | | 592 | | | 656 | | | 505 | | | 257 | | | 134 | | | — | | | 60,428 | Guarantees | | | 66 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 66 | Loan commitments | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 45,871 | | | 9,709 | | | 1,938 | | | 832 | | | 592 | | | 656 | | | 505 | | | 257 | | | 134 | | | — | | | 60,494 | | | | 271,581 | | | 47,109 | | | 35,473 | | | 26,333 | | | 9,897 | | | 11,742 | | | 11,341 | | | 10,615 | | | 7,938 | | | — | | | 432,029 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2022 | Rating Category | | | A-1 | | | A-2 | | | B-1 | | | B-2 | | | B-3 | | | C-1 | | | C-2 | | | D | | | E | | | Not Rated | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans (SME) | | | 31,683 | | | 10,255 | | | 1,668 | | | 835 | | | 2,694 | | | 1,096 | | | 697 | | | 1,809 | | | 506 | | | — | | | 51,243 | Mortgage loans | | | 173,202 | | | 10,483 | | | 5,998 | | | 3,667 | | | 1,233 | | | 3,806 | | | 6,172 | | | 4,795 | | | 1,452 | | | — | | | 210,808 | Revolving consumer credit card loans | | | 18,487 | | | 24,566 | | | 8,026 | | | 2,325 | | | 1,691 | | | 2,890 | | | 2,643 | | | 2,817 | | | 904 | | | — | | | 64,349 | Non-revolving consumer loans | | | 33,280 | | | 5,470 | | | 24,082 | | | 9,212 | | | 3,685 | | | 2,474 | | | 2,419 | | | 1,141 | | | 2,993 | | | — | | | 84,756 | | | | 256,652 | | | 50,774 | | | 39,774 | | | 16,039 | | | 9,303 | | | 10,266 | | | 11,931 | | | 10,562 | | | 5,855 | | | — | | | 411,156 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 54,908 | | | 11,316 | | | 2,196 | | | 1,072 | | | 682 | | | 738 | | | 658 | | | 342 | | | 177 | | | — | | | 72,089 | Guarantees | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Loan commitments | | | 64 | | | 32 | | | 4 | | | — | | | — | | | — | | | 7 | | | — | | | — | | | — | | | 107 | | | | 54,972 | | | 11,348 | | | 2,200 | | | 1,072 | | | 682 | | | 738 | | | 665 | | | 342 | | | 177 | | | — | | | 72,196 | | | | 311,624 | | | 62,122 | | | 41,974 | | | 17,111 | | | 9,985 | | | 11,004 | | | 12,596 | | | 10,904 | | | 6,032 | | | — | | | 483,352 |
i) Securitization Loans and advances to customers includes the securitized loans transferred to third parties on which the Bank has retained the risks and rewards, albeit partially, and which therefore, in accordance with the applicable IFRS, cannot be derecognized. As of December 31, 2021 and 2022, there were no securitized loans retained in the consolidated balance sheet related to securitized mortgage assets. Securitization is used as a tool for diversifying the Bank’s liquidity sources. The Bank had not performed any securitization in 2020, 2021 and 2022. This securitization corresponds to a transaction performed by the merged entity Santander Vivienda in 2006. 12. Hedging derivatives The Bank, as part of its financial risk management strategy and for reducing mismatches in the accounting treatment of its transactions, enters into interest rate and foreign currency hedging financial derivatives, depending on the nature of the hedged risk. In line with its objective, the Bank classifies its hedges into the following categories: | - | Cash flow hedges: hedging the exposure to variability in cash flows associated with an asset, liability or highly probable forecast transaction. |
| - | Fair value hedges: hedging the exposure to changes in the fair value of assets or liabilities attributable to an identified hedged risk. |
a) Breakdown The breakdown by type of hedge of the financial derivatives qualifying for hedge accounting is as follows: | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | | | | | | | | | | | | Fair value hedges | | | 1,468 | | | 7,018 | | | 4,923 | | | 3,205 | Cash flow hedges | | | 9,780 | | | 1,144 | | | 5,258 | | | 1,256 | | | | 11,248 | | | 8,162 | | | 10,181 | | | 4,461 |
b) Quantitative information Fair value hedges As of December 31, 2021, the hedging financial derivative positions are as follows: | | | | | | | | | | | | | | | | | | | Nominal | | | | | | | | | | | | | (Million in | | | | | | | | | | Nominal | | | Transaction | | | Transaction | | | | | | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged | | | | | | | | | | | | | | IRS | | | 1,867 | | | 1,867 | | | Peso | | | Loans - Interest rate risk | | | | | | | | | | | | | | IRS | | | 47,047 | | | 47,047 | | | Peso | | | M Bonds - Interest rate risk | | | | | | | | | | | | | | CCS | | | 4 | | | 1 | | | USD | | | Loans - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 17,744 | | | 819 | | | Euro | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 7,824 | | | 398 | | | USD | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 1,492 | | | 58 | | | Pound sterling | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 1,895 | | | 405 | | | UDI | | | UDIBONDS - Interest rate and inflation risk | | | | | | | | | | | | | |
As of December 31, 2022, the hedging financial derivative positions are as follows: | | | | | | | | | | | | | | | | | | | Nominal | | | | | | | | | | | | | (Million in | | | | | | | | | | Nominal | | | Transaction | | | Transaction | | | | | | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged | | | | | | | | | | | | | | IRS | | | 1,600 | | | 1,600 | | | Peso | | | Loans - Interest rate risk | | | | | | | | | | | | | | IRS | | | 6,500 | | | 6,500 | | | Peso | | | Unsecured notes - Interest rate risk | | | | | | | | | | | | | | IRS | | | 2,731 | | | 2,731 | | | Peso | | | Promissory notes - Interest rate risk | | | | | | | | | | | | | | IRS | | | 117,701 | | | 117,701 | | | Peso | | | M Bonds - Interest rate risk | | | | | | | | | | | | | | CCS | | | 9,887 | | | 447 | | | Euro | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 7,824 | | | 398 | | | USD | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 1,492 | | | 58 | | | Pound sterling | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 1,895 | | | 405 | | | UDI | | | UDIBONDS - Interest rate and inflation risk | | | | | | | | | | | | | |
The fair value hedges carried out by the Bank are extended in certain cases up to the year 2034. For 2020, 2021 and 2022, the effect of valuation for the period of the financial derivative instruments for fair value hedging purposes recognized in the consolidated income statement is included under Gains/(losses) on financial assets and liabilities (net) of (6,884) million pesos, 8,746 million pesos and 5,225 million pesos, respectively (see Note 39). For 2020, 2021 and 2022, the effect of valuation arising from the risk being hedged of the hedged items for fair value hedging purposes recognized in the consolidated income statement is included Gains/(losses) on financial assets and liabilities (net) of 6,427 million pesos, (9,278) million pesos and (4,903) million pesos, respectively (see Note 39). Each of these hedging financial derivative instruments is presented in the consolidated balance sheet under Hedging derivatives. Cash flow hedges As of December 31, 2021, the positions in financial derivatives for cash flow hedging purposes are as follows: | | | | | | | | | | | | | | | | | | | Nominal | | | | | | | | | | | | | (Million in | | | | | | | | | | Nominal | | | Transaction | | | Transaction | | | | | | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged | | | | | | | | | | | | | | IRS | | | 7,311 | | | 7,311 | | | Peso | | | Unsecured notes - Interest rate risk | | | | | | | | | | | | | | CCS | | | 523 | | | 41 | | | USD | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 491 | | | 29 | | | Euro | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 11,125 | | | 543 | | | USD | | | Senior Unsecured Notes - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 519 | | | 25 | | | Euro | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 260 | | | 10 | | | Pound sterling | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 911 | | | 50 | | | USD | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | Forward Fx-BRL | | | 28,787 | | | 8,295 | | | BRL | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | | Forward Fx-USD | | | 36,171 | | | 1,466 | | | USD | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | |
As of December 31, 2022, the positions in financial derivatives for cash flow hedging purposes are as follows: | | | | | | | | | | | | | | | | | | | Nominal | | | | | | | | | | | | | (Million in | | | | | | | | | | Nominal | | | Transaction | | | Transaction | | | | | | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged | | | | | | | | | | | | | | CCS | | | 174 | | | 14 | | | USD | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 351 | | | 21 | | | Euro | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 260 | | | 10 | | | Pound sterling | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 911 | | | 50 | | | USD | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 7,196 | | | 1,917 | | | BRL | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | | Forward Fx-BRL | | | 16,425 | | | 5,187 | | | BRL | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | | Forward Fx-USD | | | 33,353 | | | 1,342 | | | USD | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | |
As of December 31, 2021 included in other comprehensive income under Valuation adjustments – Cash flow hedges, were (6) million pesos (see Note 28), which refer to the accumulated unamortized gain (net of the related deferred tax effect) of hedging financial derivatives for which hedge accounting was discontinued. Such balances are being reclassified based on the original terms of the forecast transactions. The term of such reclassifying extends through the year 2022. The remaining amount of Valuation adjustments – Cash flow hedges reflected in other comprehensive income consists of accumulated unrealized gain or loss on effective cash flow hedges currently in effect. The cash flow hedges entered into by the Bank are extended in certain cases up to the year 2025 for Brazilian Government Notes and for Loans and advances to customers and up to the year 2026 for UMS. A reconciliation of Valuation adjustments – Cash flow hedges is as follows: | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Balance at January 1 | | | (276) | | | (569) | | | 414 | | Valuation adjustments | | | (376) | | | 1,394 | | | (1,224) | | Amounts reclassified to consolidated income statement | | | (43) | | | 11 | | | 8 | | Of which: | | | | | | | | | | | Income from cash flow hedging financial derivatives and discontinued cash flow hedge accounting | | | (43) | | | 11 | | | 8 | | Cash flow hedges ineffectiveness (Note 39) | | | — | | | — | | | — | | Income taxes | | | 126 | | | (422) | | | 365 | | Balance at December 31 | | | (569) | | | 414 | | | (437) | |
As of December 31, 2022, the breakdown of the estimated cash flows of the cash flow hedges that are expected to be reclassified from other comprehensive income to the consolidated income statement is as follows: | | | | | | | | | | | | | | | | | | | | | | | Between 3 Months and | | | Between 1 Year and 5 | | | | | | | | | | | Less than 3 Months | | | 1 Year | | | Years | | | More than 5 Years | | | Total | | | | | | | | | | | | | | | | | | | Cash flows to be received | | | 13 | | | 40 | | | 21 | | | — | | | 74 | | Cash flows to be paid | | | (242) | | | (205) | | | (234) | | | (17) | | | (698) | |
Note 45.a contains a breakdown of the remaining maturity periods of hedging financial derivatives. 13. Non-current assets held for sale a) Breakdown The breakdown by type of non-current assets held for sale is as follows: | | | | | | | | | | | | | | | | | | | 2021 | | | 2022 | | | | | | | | | | Foreclosed assets | | | 773 | | | 1,429 | | Investment held for sale | | | — | | | 1,586 | | | | | 773 | | | 3,015 | |
b) Foreclosed assets In 2020, 2021 and 2022, the Bank recognized from the sale of foreclosed assets a gain of 9 million pesos, a gain of 20 million pesos and a loss of 70 million pesos, respectively, under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) in the consolidated income statement. For the year ended December 31, 2020 and 2021 the Bank recognized an impairment loss of 119 million pesos and 27 million pesos respectively, under Impairment losses on other assets (net) in the consolidated income statement. During 2022, the Bank has not recognized any impairment loss in the consolidated income statement The changes in foreclosed assets in the consolidated balance sheet were as follows: | | | | | |
|
| Foreclosed Assets |
| | | | | | Balances at January 1, 2021 | | | 551 | | Additions | | | 559 | | Disposals | | | (310) | | Impairment losses | | | (27) | | Balances at December 31, 2021 | | | 773 | | Additions | | | 812 | | Disposals | | | (156) | | Impairment losses | | | — | | Balances at December 31, 2022 |
| | 1,429 | |
c) Investment held for sale After Santander Merchant Platform Solutions México, S.A. de C.V. (SMPS México) was authorized to operate as a Participant in Disposal Networks (Participante en Redes de Medios de Disposición) in its capacity as Acquirer, Banco Santander México entered into an agreement with PagoNxt Merchant Solutions, S.L. and PagoNxt, S.L. on August 29, 2022 to sell the Bank´s 49% of participation in SMPS México represented by 1,139,735,235 common shares, at a sale price of 1,948 million pesos. This transaction is part of the global strategy of Banco Santander (Spain) to consolidate the acquiring business. This transaction will take effect once all the necessary regulatory approvals have been obtained, the Bank expects to obtain them during fiscal year 2023. The amount presented in the consolidated balance sheets represents the net book value of the 49% of participation in SPMS Mexico. 14. Tangible assets a) Changes The changes in Tangible assets in the consolidated balance sheet were as follows: | | | | | |
|
| Tangible Assets |
| | | | | | Cost: | | | | | Balances at January 1, 2021 | | | 23,087 | | Additions | | | 2,450 | | Disposals | | | (187) | | Balances at December 31, 2021 |
| | 25,350 | | Additions | | | 3,314 | | Disposals | | | (491) | | Balances at December 31, 2022 |
| | 28,173 | | | | | | | Accumulated depreciation: | | | | | Balances at January 1, 2021 | | | (10,881) | | Additions | | | (2,032) | | Disposals | | | 183 | | Balances at December 31, 2021 |
| | (12,730) | | Additions | | | (2,227) | | Disposals | | | 491 | | Balances at December 31, 2022 |
| | (14,466) | | | | | | | Balances at December 31, 2021 |
| | 12,620 | | Balances at December 31, 2022 |
| | 13,707 | |
As of December 31, 2022, there are no restrictions on title and no tangible assets have been pledged as collateral for liabilities. b) Breakdown by asset class | | | | | | | | | | | | | | | | Accumulated | | | | | | | Cost | | | Depreciation | | | Carrying Amount | | | | | | | | | | | Buildings | | | 14,640 | | | (7,522) | | | 7,118 | IT equipment and fixtures | | | 6,922 | | | (3,355) | | | 3,567 | Furniture and vehicles | | | 3,226 | | | (1,853) | | | 1,373 | Other fixtures | | | 562 | | | — | | | 562 | Balances at December 31, 2021 | | | 25,350 | | | (12,730) | | | 12,620 | | | | | | | | | | | Buildings | | | 15,638 | | | (8,494) | | | 7,144 | IT equipment and fixtures | | | 7,609 | | | (4,020) | | | 3,589 | Furniture and vehicles | | | 3,479 | | | (1,952) | | | 1,527 | Other fixtures | | | 1,447 | | | — | | | 1,447 | Balances at December 31, 2022 | | | 28,173 | | | (14,466) | | | 13,707 |
15. Leases a) Right-of-use assets Lease information with the Bank as lessee is as follows: | | | | | | | | | | | | Branch | | | Furniture | | | | | | offices | | | and vehicles | | Total | Balances at January 1, 2021 | | | 5,435 | | | 208 | | 5,643 | Remeasurement of right-of-use assets | | | 551 | | | — | | 551 | Additions in right-of-use assets | | | 663 | | | 63 | | 726 | Disposals | | | (1,542) | | | (95) | | (1,637) | Depreciation | | | (108) | | | — | | (108) | Balances at December 31, 2021 | | | 4,999 | | | 176 | | 5,175 | Remeasurement of right-of-use assets | | | 669 | | | — | | 669 | Additions in right-of-use assets | | | 2,372 | | | — | | 2,372 | Depreciation | | | (1,651) | | | (125) | | (1,776) | Disposals | | | (176) | | | — | | (176) | Balances at December 31, 2022 | | | 6,213 | | | 51 | | 6,264 |
b) Lease liabilities Following is an analysis of activity in Lease liabilities as of December 31, 2022: | | | | | | | Amount | | | | | Balances at January 1, 2021 | | | 6,131 | Interest expense | | | 646 | New contracts | | | 725 | Remeasurement on leases liabilities | | | 350 | Disposals | | | (103) | Payments | | | (2,033) | Balances at December 31, 2021 | | | 5,716 | Interest expense | | | 530 | New contracts | | | 2,372 | Remeasurement on leases liabilities | | | 679 | Disposals | | | (57) | Payments | | | (2,275) | Balances at December 31, 2022 | | | 6,965 |
The following table sets out a maturity analysis of lease payments: | | | | | | | December 31, 2022 | Maturity analysis - contractual undiscounted cash flows | | | | Less than one year | | | 2,001 | One to three years | | | 3,086 | Three to five years | | | 2,038 | More than five years | | | 1,999 | Total undiscounted lease liabilities at December 31, 2022 | | | 9,124 | Lease liabilities at December 31, 2022 | | | 6,965 | | | | | Current | | | 1,700 | Long-term | | | 5,265 |
c) Leaseback In the second quarter of 2012, the Bank entered into an agreement with a non-related party, Fibra Uno, S.A. de C.V. (hereinafter, “Fibra Uno”) regarding the sale of 220 properties (branches, offices and parking spaces) and the subsequent leaseback thereof for a term of 20 years. The corresponding lease contract is non-cancellable and includes an option to renew up to an additional four consecutive periods of five years each with a market rate to be determined on the date of the renewal. The lease agreement includes rent adjustments based on the consumer price index (or INPC) and does not contain volume-based or leveraged contingent rent payment clauses or purchase options, or impose any restrictions on the Bank’s ability to pay dividends, engage in debt financing transactions or enter into further lease agreements. Because this was a sale and operating leaseback under IAS 17 Leases, at the date of initial application of IFRS 16 the Bank accounts for the leaseback in the same way as it accounts for its leases of other operating lease contracts. d) Additional information | | | | | | | December 31, 2022 | Amounts recognized in the consolidated income statementstatement: | | | | Interest expense on lease liabilities | | | 530 | Expense relating to short-term leases | | | 10 | Expense relating to leases of low-value assets that are not shown above as of December 31, 2020 is as follows:short-term leases | | | | |
|
|
| 2020
|
| | | 761 | Expense relating to variable lease payments not included in lease liabilities | | | — | Cash flows from lease liabilities: | | | | Total leases cash flows | | | (771) |
|
|
|
|
| Commercial, financial and industrial loans
|
| | (605)
|
| Mortgage loans
|
|
| (224)
|
| Installment loans to individuals -
|
|
|
|
| Non-revolving consumer loans
|
|
| (914)
|
|
|
|
| (1,743)
|
|
h) Maximum exposure to credit risk and credit quality information
Maximum exposure to credit risk
The tables below represent the Bank’s maximum exposure to credit risk by class of financial instrument (except for hedging financial derivatives) and the respective collateral and other credit enhancements mitigating credit risk for these classes of financial instruments. The maximum exposure to credit risk includes the carrying amounts of financial instruments recognized in the consolidated balance sheet subject to credit risk and the nominal amounts for off-balance sheet commitments.
Where available, collaterals
|
16. Intangible assets – Goodwill As of December 31, 2021 and 2022, Goodwill amounted to 1,734 million pesos. a) Impairment test The main assumptions used in the calculation of the impairment of Goodwill are presented at fair value; for other collaterals, such as real estate and other assets, best estimates of fair value are used. Other credit enhancements such as guarantees are included at their nominal amounts. Collateral or guarantees are credit enhancements in the form of an asset or third-party obligation that serve to mitigate the inherent risk of credit loss in an exposure, by either substituting the borrower default risk or improving recoveries in the event of a default. The Bank’s collateral or guarantees are contractual and are typically classified as follows:
| ● | Financial and other collateral, which enables the Bank to recover all or part of the outstanding exposure by liquidating the collateral asset provided in cases where the borrower is unable or unwilling to fulfill its primary obligations. Cash collateral, securities (debt or equity instruments), collection rights, inventory, equipment and real estate are included in this category: |
| -
| Cash collateral received - cash collateral requested from financial and corporate customers to secure the payments in OTC financial derivatives transactions.
| -
| Collateralized by securities - collateral to secure the payments in repurchase agreements and reverse repurchase agreements transactions.
| |
|
| Hypotheses |
| -
| Collection rights - highly liquid and realizable guarantees, which are mainly comprised of standby letters and pledges on funds and securities.
| | | | |
| -
| Real estate.
| Basis of valuation | | | Value in use: discounted cash flows |
| ● | Guarantees, which complements the customer’s ability to fulfill its obligation under the legal contract and, as such, is provided by third parties in the form of individual guarantee by endorsement or co-signers, where individuals or companies act as guarantors of the loan transaction. | Period of projection of cash flows(1) | | | 10 years | Perpetual cash flow | | | (2) | Discount rate(6) | | | 12.39% | Of which: | | | | Cost of Equity(3) |
| | 17.47% | Cost of Debt(4) |
| | 10.70% | Equity Structure(5) |
| | 25% Equity / 75% Debt |
Collaterals and other credit enhancements related to the commercial loan portfolio are subject to at least an annual review. In the case
| (1) | The period of guarantees, the guarantor’s ability to perform under the guarantee contract is reviewed through an analysisprojections of the financial position of the customer and the guarantor. There are cases where the Bank has attempted to seek recovery through the execution of a third-party guarantee and has been denied such recovery. Please see Note 2.g for an explanation of how the credit ratings of guarantors affect our allowance for impairment losses.For the retail loan portfolio, a review of its collaterals and other credit enhancements is performed on a periodic basis depending on the history of the payment performance of the borrower.
For the real estate collaterals, appraisals are obtained as of the date of origination of the loans and when the loan is classified as impaired.
See Note 48.b) 4.3 Credit risk mitigation techniques for additional information regarding credit risk mitigation.
The breakdown is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2019 | | | | | | | Maximum Exposure | | | | | | | | | | | | | | | | | | | Maximum | | | to Credit Risk (1) | | | Collaterals | | | Other Credit Enhancements | | | | Exposure to | | | | | | | | | Cash Collateral | | | Collateralized by | | | | | | | | | | | | | Credit Risk | | | Unsecured | | | Secured | | | Received | | | Securities | | | Collection Rights (3) | | | Real Estate (2) | | | Guarantees | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through profit or loss | | | 262,360 | | | 239,865 | | | 22,495 | | | 16,759 | | | 5,736 | | | — | | | — | | | — | Other financial assets at fair value through profit or loss | | | 79,927 | | | — | | | 79,927 | | | — | | | 76,592 | | | — | | | — | | | — | Financial assets at fair value through other comprehensive income | | | 236,343 | | | 236,343 | | | — | | | — | | | — | | | — | | | — | | | — | Financial assets at amortized cost: | | | 769,788 | | | 316,232 | | | 453,556 | | | — | | | — | | | 69,732 | | | 148,360 | | | 8,118 | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions | | | 36,895 | | | 36,895 | | | — | | | — | | | — | | | — | | | — | | | — | Loans and advances to customers: | | | 721,636 | | | 268,080 | | | 453,556 | | | — | | | — | | | 69,732 | | | 148,360 | | | 8,118 | Commercial, financial and industrial loans | | | 376,878 | | | 106,672 | | | 270,206 | | | — | | | — | | | 45,058 | | | 25,308 | | | 8,118 | Public sector loans | | | 70,450 | | | 26,867 | | | 43,583 | | | — | | | — | | | 24,646 | | | — | | | — | Mortgage loans | | | 156,209 | | | 19,077 | | | 137,132 | | | — | | | — | | | — | | | 120,461 | | | — | Installment loans to individuals: | | | | | | | | | | | | | | | | | | | | | | | | | Revolving consumer credit card loans | | | 59,477 | | | 59,477 | | | — | | | — | | | — | | | — | | | — | | | — | Non-revolving consumer loans | | | 58,622 | | | 55,987 | | | 2,635 | | | — | | | — | | | 28 | | | 2,591 | | | — | Debt instruments | | | 11,257 | | | 11,257 | | | — | | | — | | | — | | | — | | | — | | | — | Guarantees and loan commitments | | | 80,169 | | | 80,169 | | | — | | | — | | | — | | | — | | | — | | | — | Available lines of credit cards and non-revolving consumer loans | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 1,428,587 | | | 872,609 | | | 555,978 | | | 16,759 | | | 82,328 | | | 69,732 | | | 148,360 | | | 8,118 |
(1) | Correspond to loans and advances to customers and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total collaterals and other credit enhancements as certain loans and advances to customers are secured by multiple credit enhancements. |
(2) | Appraisals to support estimated fair value of the real estate collaterals are obtained at loan origination. |
(3) | Public sector loan rights are guaranteed by Mexican government entities. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2020 | | | | | | | Maximum Exposure | | | | | | | | | | | | | | | | | | | Maximum | | | to Credit Risk (1) | | | Collaterals | | | Other Credit Enhancements | | | | Exposure to | | | | | | | | | Cash Collateral | | | Collateralized by | | | | | | | | | | | | | Credit Risk | | | Unsecured | | | Secured | | | Received | | | Securities | | | Collection Rights (3) | | | Real Estate (2) | | | Guarantees | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through profit or loss | | | 502,443 | | | 473,908 | | | 28,535 | | | 23,052 | | | 5,483 | | | — | | | — | | | — | Other financial assets at fair value through profit or loss | | | 70,356 | | | — | | | 70,356 | | | — | | | 59,557 | | | — | | | — | | | — | Financial assets at fair value through other comprehensive income | | | 355,321 | | | 355,321 | | | — | | | — | | | — | | | — | | | — | | | — | Financial assets at amortized cost: | | | 712,983 | | | 208,053 | | | 504,930 | | | — | | | — | | | 83,544 | | | 176,841 | | | 7,073 | Of which: | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Loans and advances to customers | | | 712,983 | | | 208,053 | | | 504,930 | | | — | | | — | | | 83,544 | | | 176,841 | | | 7,073 | Commercial, financial and industrial loans | | | 346,075 | | | 72,756 | | | 273,319 | | | — | | | — | | | 45,694 | | | 29,342 | | | 7,073 | Public sector loans | | | 73,016 | | | 21,510 | | | 51,506 | | | — | | | — | | | 34,677 | | | — | | | — | Mortgage loans | | | 177,665 | | | 5,007 | | | 172,658 | | | — | | | — | | | 3,140 | | | 140,096 | | | — | Installment loans to individuals: | | | | | | — | | | — | | | | | | | | | | | | | | | | Revolving consumer credit card loans | | | 53,809 | | | 53,809 | | | — | | | — | | | — | | | — | | | — | | | — | Non-revolving consumer loans | | | 62,418 | | | 54,971 | | | 7,447 | | | — | | | — | | | 33 | | | 7,403 | | | — | Debt instruments | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Guarantees and loan commitments | | | 83,645 | | | 83,645 | | | — | | | — | | | — | | | — | | | — | | | — | | | �� | 1,724,748 | | | 1,120,927 | | | 603,821 | | | 23,052 | | | 65,040 | | | 83,544 | | | 176,841 | | | 7,073 |
(1) | Correspond to loans and advances to customers and available lines of credit cards and non-revolving consumer loans in the first column (Maximum Exposure to Credit Risk) that are secured by collaterals and other credit enhancements disclosed in the table. As such, unsecured amounts are the amounts that are not covered by any collateral or other credit enhancement. The secured amounts may differ from the total |
| collaterals and other credit enhancements as certain loans and advances to customers are secured by multiple credit enhancements. |
(2) | Appraisals to support estimated fair value of the real estate collaterals are obtained at loan origination. |
(3) | Public sector loan rights are guaranteed by Mexican government entities. |
Credit quality information
For commercial loans (except Small and medium-sized enterprises or SME) and public sector loans, in order to achieve equivalent internal ratings in the different models available and to make them comparable with the external ratings of rating agencies, the Bank has developed a master rating scale. The equivalence is established through the PD associated with each rating. Internally calibrated PD are compared against the default rates associated with the external ratings, which are published periodically by rating agencies. The internal rating scale and mapping with external ratings are as follows:
| | | | | | |
|
|
| Equivalence with
|
|
|
| Standard &
|
|
|
| Internal Rating
|
|
| Poor’s
|
|
| Moody’s
|
|
|
|
|
|
|
| 9.3
|
| | Aaa
|
| | AAA
| 9.2
|
| | Aa1
|
| | AA+
| 9.0
|
| | Aa2
|
| | AA
| 8.6
|
| | Aa3
|
| | AA-
| 8.1
|
| | A1
|
| | A+
| 7.7
|
| | A2
|
| | A
| 7.3
|
| | A3
|
| | A-
| 6.7
|
| | Baa1
|
| | BBB+
| 6.1
|
| | Baa2
|
| | BBB
| 5.6
|
| | Baa3
|
| | BBB-
| 5.0
|
| | Ba1
|
| | BB+
| 4.4
|
| | Ba2
|
| | BB
| 3.9
|
| | Ba3
|
| | BB-
| 3.3
|
| | B1
|
| | B+
| 2.7
|
| | B2
|
| | B
| 2.2
|
| | B3
|
| | B-
| 1.6
|
| | Caa1
|
| | CCC
| 1.0
|
| | Ca
|
| | CC
|
For commercial loans to Small and medium-sized enterprises (SME), mortgage loans and installment loans to individuals (revolving credit card consumer loans and non-revolving consumer loans), expected credit losses are calculated using statistical methods without considering internal ratings. However, based on
criteria set forth by the CNBV and a combination of internal scorecards, customer’s financial information and qualitative criteria, ratings are assigned as follows:
| | | |
|
|
|
| Rating
|
|
| Equivalence
|
|
|
|
| A-1
|
| | Minimum Risk (Solid)
| A-2
|
| | Low Risk (Outstanding)
| B-1
|
| | Normal Risk (Good)
| B-2
|
| | Normal Risk
| B-3
|
| | Satisfactory
| C-1
|
| | Normal Risk (Adequate)
| C-2
|
| | Medium Risk (Weak)
| D
|
| | High Risk (Poor)
| E
|
| | Probable Loss
|
Credit quality information by rating category
The tables below represent the classification by rating category of commercial loans (except SME) and public sector loans and their related guarantees and loan commitments not recognized in the consolidated balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Not | | | Rating Category | | 9.3 | | 9.2 | | 9.0 | | 8.5 | | 8.0 | | 7.5 | | 7.0 | | 6.5 | | 6.0 | | 5.5 | | 5.0 | | 4.5 | | 4.0 | | 3.5 | | 3.0 | | 2.5 | | 2.0 | | 1.5 | | 1.0 | | Rated | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans (except SME) | | — | | — | | — | | — | | — | | 2,004 | | 21,925 | | 33,028 | | 32,090 | | 75,766 | | 94,840 | | 21,098 | | 5,734 | | 1,112 | | 1,453 | | 235 | | 301 | | — | | 1,477 | | 12,144 | | 303,207 | Public sector loans | | — | | — | | 4,506 | | — | | — | | — | | 26,566 | | 2,055 | | 5,491 | | 13,684 | | 16,297 | | 1,285 | | — | | — | | — | | — | | — | | — | | — | | 566 | | 70,450 | | | — | | — | | 4,506 | | — | | — | | 2,004 | | 48,491 | | 35,083 | | 37,581 | | 89,450 | | 111,137 | | 22,383 | | 5,734 | | 1,112 | | 1,453 | | 235 | | 301 | | — | | 1,477 | | 12,710 | | 373,657 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Guarantees | | 597 | | — | | — | | 4,009 | | 15,457 | | 4,347 | | 8,290 | | 12,566 | | 5,848 | | 3,780 | | 2,082 | | 167 | | — | | — | | — | | — | | 75 | | — | | — | | 913 | | 58,131 | Loan commitments | | — | | — | | — | | 57 | | 139 | | 301 | | 20 | | 228 | | 3,472 | | 6,119 | | 5,877 | | 1,443 | | 76 | | — | | — | | — | | — | | — | | — | | 363 | | 18,095 | | | 597 | | — | | — | | 4,066 | | 15,596 | | 4,648 | | 8,310 | | 12,794 | | 9,320 | | 9,899 | | 7,959 | | 1,610 | | 76 | | — | | — | | — | | 75 | | — | | — | | 1,276 | | 76,226 | | | 597 | | — | | 4,506 | | 4,066 | | 15,596 | | 6,652 | | 56,801 | | 47,877 | | 46,901 | | 99,349 | | 119,096 | | 23,993 | | 5,810 | | 1,112 | | 1,453 | | 235 | | 376 | | — | | 1,477 | | 13,986 | | 449,883 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Not | | | Rating Category | | 9.3 | | 9.2 | | 9.0 | | 8.5 | | 8.0 | | 7.5 | | 7.0 | | 6.5 | | 6.0 | | 5.5 | | 5.0 | | 4.5 | | 4.0 | | 3.5 | | 3.0 | | 2.5 | | 2.0 | | 1.5 | | 1.0 | | Rated | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans (except SME) | | — | | — | | — | | — | — | — | — | 1,751 | | 11,269 | | 41,729 | | 26,484 | | 68,363 | | 84,532 | | 21,204 | | 12,389 | | 4,156 | | 3,334 | | 4,257 | | 998 | | 704 | | 555 | | 7,806 | | 289,531 | Public sector loans | | — | | — | | — | | — | — | — | — | — | | 8,966 | | — | | 5,005 | | 8,893 | | 27,846 | | 8,736 | | — | | — | | — | | — | | — | | — | | — | | — | | 59,446 | | | — | | — | | — | | — | | — | | 1,751 | | 20,235 | | 41,729 | | 31,489 | | 77,256 | | 112,379 | | 29,940 | | 12,389 | | 4,156 | | 3,334 | | 4,257 | | 998 | | 704 | | 555 | | 7,806 | | 348,977 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Guarantees | | 520 | | — | | 157 | | 8,474 | | 16,638 | | 3,945 | | 2,251 | | 10,032 | | 11,108 | | 3,916 | | 2,868 | | 101 | | — | | — | | 39 | | — | | — | | 75 | | 6 | | 2,399 | | 62,529 | Loan commitments | | — | | — | | — | | 40 | | 274 | | 124 | | 21 | | 412 | | 3,516 | | 9,606 | | 5,006 | | 980 | | 127 | | — | | 887 | | — | | — | | — | | — | | 9 | | 21,002 | | | 520 | | — | | 157 | | 8,514 | | 16,912 | | 4,069 | | 2,272 | | 10,444 | | 14,624 | | 13,522 | | 7,874 | | 1,081 | | 127 | | — | | 926 | | — | | — | | 75 | | 6 | | 2,408 | | 83,531 | | | 520 | | — | | 157 | | 8,514 | | 16,912 | | 5,820 | | 22,507 | | 52,173 | | 46,113 | | 90,778 | | 120,253 | | 31,021 | | 12,516 | | 4,156 | | 4,260 | | 4,257 | | 998 | | 779 | | 561 | | 10,214 | | 432,508 |
The tables below represent the classification by rating category of commercial loans (SME), mortgage loans, revolving consumer credit card loans and non-revolving consumer loans and their related commitments not recognized in the consolidated balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2019 | Rating Category | | | A-1 | | | A-2 | | | B-1 | | | B-2 | | | B-3 | | | C-1 | | | C-2 | | | D | | | E | | | Not Rated | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans (SME) | | | 50,253 | | | 6,730 | | | 2,553 | | | 2,575 | | | 9,046 | | | 2,068 | | | 723 | | | 1,941 | | | 674 | | | — | | | 76,563 | Mortgage loans | | | 117,983 | | | 3,384 | | | 1,685 | | | 14,161 | | | 1,114 | | | 4,936 | | | 3,465 | | | 4,507 | | | 694 | | | 211 | | | 152,140 | Revolving consumer credit card loans | | | 3,165 | | | 17,396 | | | 16,396 | | | 5,842 | | | 2,945 | | | 4,791 | | | 4,227 | | | 3,332 | | | 1,383 | | | — | | | 59,477 | Non-revolving consumer loans | | | 9,511 | | | 6,886 | | | 14,618 | | | 8,756 | | | 7,076 | | | 4,110 | | | 2,483 | | | 1,148 | | | 3,067 | | | — | | | 57,655 | | | | 180,912 | | | 34,396 | | | 35,252 | | | 31,334 | | | 20,181 | | | 15,905 | | | 10,898 | | | 10,928 | | | 5,818 | | | 211 | | | 345,835 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 6,914 | | | 7,786 | | | 8,113 | | | 4,565 | | | 3,425 | | | 4,743 | | | 4,533 | | | 1,921 | | | 2,468 | | | — | | | 44,468 | Guarantees | | | 37 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 37 | Loan commitments | | | 183 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 183 | | | | 7,134 | | | 7,786 | | | 8,113 | | | 4,565 | | | 3,425 | | | 4,743 | | | 4,533 | | | 1,921 | | | 2,468 | | | — | | | 44,688 | | | | 188,046 | | | 42,182 | | | 43,365 | | | 35,899 | | | 23,606 | | | 20,648 | | | 15,431 | | | 12,849 | | | 8,286 | | | 211 | | | 390,523 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2020 | Rating Category | | | A-1 | | | A-2 | | | B-1 | | | B-2 | | | B-3 | | | C-1 | | | C-2 | | | D | | | E | | | Not Rated | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial loans (SME) | | | 44,392 | | | 4,779 | | | 2,771 | | | 2,327 | | | 4,455 | | | 1,566 | | | 588 | | | 3,762 | | | 1,092 | | | — | | | 65,732 | Mortgage loans | | | 138,867 | | | 6,170 | | | 3,626 | | | 6,523 | | | 2,218 | | | 5,295 | | | 4,303 | | | 4,355 | | | 1,443 | | | 190 | | | 172,990 | Revolving consumer credit card loans | | | 9,804 | | | 16,790 | | | 7,746 | | | 3,826 | | | 2,625 | | | 3,586 | | | 3,891 | | | 4,612 | | | 927 | | | — | | | 53,807 | Non-revolving consumer loans | | | 14,225 | | | 5,548 | | | 17,865 | | | 8,667 | | | 4,427 | | | 2,675 | | | 2,524 | | | 1,050 | | | 4,573 | | | — | | | 61,554 | | | | 207,288 | | | 33,287 | | | 32,008 | | | 21,343 | | | 13,725 | | | 13,122 | | | 11,306 | | | 13,779 | | | 8,035 | | | 190 | | | 354,083 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial instruments not recognized in the consolidated balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 29,062 | | | 10,754 | | | 2,698 | | | 1,251 | | | 905 | | | 938 | | | 701 | | | 248 | | | 89 | | | — | | | 46,646 | Guarantees | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | Loan commitments | | | 103 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8 | | | — | | | 111 | | | | 29,166 | | | 10,754 | | | 2,698 | | | 1,251 | | | 905 | | | 938 | | | 701 | | | 248 | | | 97 | | | — | | | 46,758 | | | | 236,454 | | | 44,041 | | | 34,706 | | | 22,594 | | | 14,630 | | | 14,060 | | | 12,007 | | | 14,027 | | | 8,132 | | | 190 | | | 400,841 |
i) Securitization
Loans and advances to customers includes the securitized loans transferred to third parties on which the Bank has retained the risks and rewards, albeit partially, and which therefore, in accordance with the applicable IFRS, cannot be derecognized. As of December 31, 2019, and 2020, the securitized loans retained in the consolidated balance sheet related to securitized mortgage assets amounts to 130 million pesos and 114 million pesos, respectively.
Securitization is used as a tool for diversifying the Bank’s liquidity sources. The Bank had not performed any securitization in 2018, 2019 and 2020 and prior years. This securitization corresponds to a transaction performed by the merged entity Santander Vivienda in 2006.
The loans transferred through securitization are mortgage loans.
12. Hedging derivatives
The Bank, as part of its financial risk management strategy and for reducing mismatches in the accounting treatment of its transactions, enters into interest rate and foreign currency hedging financial derivatives, depending on the nature of the hedged risk.
In line with its objective, the Bank classifies its hedges into the following categories:
| -
| Cash flow hedges: hedging the exposure to variability in cash flows associated with an asset, liability or highly probable forecast transaction.
|
| -
| Fair value hedges: hedging the exposure to changes in the fair value of assets or liabilities attributable to an identified hedged risk.
|
As mentioned in Note 2, the Bank has been applying hedge accounting under IAS 39. The Bank’s risk management strategy has not changed due to the COVID-19 pandemic and determined that the timing of forecast transactions has no changed and the cash flows are truly expected to occur.
Asprepared using internal budgets and growth plans of December 31, 2020, the Bank hasBanks’ Management, based on historical data, market expectations and conditions such as industry growth and inflation.
|
| (2) | The perpetual cash flow hedges of LIBOR interest risk. Whenever the replacement occurs, the Bank expects to apply the two phases amendments related to hedge accounting issued by the IASB (IBOR Reform Phase 1 and Phase 2). However, there is uncertainty about when and how replacement may occur. When the change occurs to the hedged items or the hedging instruments, the Bank will remeasure the cumulative change in fair value of the hedged items or the fair value of the CCS, respectively.Hedging relationships may experience hedge ineffectiveness if there is a timing or other mismatch between the transition of the hedged items and that of the hedging instruments. The Bank does not expect that amounts recognized in other comprehensive income under Valuation adjustments – Cash flow hedges will be immediately reclassified to the consolidated income statement due to IBOR Reform.
a) Breakdown
The breakdown by type of hedge of the financial derivatives qualifying for hedge accounting is as follows:
| | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | | | | | | | | | | | | Fair value hedges | | | 925 | | | 5,306 | | | 11 | | | 16,604 | Cash flow hedges | | | 8,331 | | | 2,217 | | | 8,295 | | | 2,474 | | | | 9,256 | | | 7,523 | | | 8,306 | | | 19,078 |
b) Quantitative information
Fair value hedges
As of December 31, 2019, the hedging financial derivative positions are as follows:
| | | | | | | | | | | | | | | | | | | Nominal | | | | | | | | | | | | | (Million in | | | | | | | | | | Nominal | | | Transaction | | | Transaction | | | | | | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged | | | | | | | | | | | | | | IRS | | | 3,900 | | | 3,900 | | | Peso | | | Loans - Interest rate risk | | | | | | | | | | | | | | IRS | | | 114 | | | 6 | | | USD | | | Loans - Interest rate risk | | | | | | | | | | | | | | IRS | | | 6,422 | | | 6,422 | | | Peso | | | Promissory notes - Interest rate risk | | | | | | | | | | | | | | IRS | | | 47,046 | | | 47,046 | | | Peso | | | M Bonds - Interest rate risk | | | | | | | | | | | | | | CCS | | | 313 | | | 13 | | | USD | | | Loans - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 25,256 | | | 1,181 | | | Euro | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 5,394 | | | 280 | | | USD | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 1,492 | | | 58 | | | Pound sterling | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 3,287 | | | 703 | | | UDI | | | UDIBONDS - Interest rate and inflation risk | | | | | | | | | | | | | |
As of December 31, 2020, the hedging financial derivative positions are as follows:
| | | | | | | | | | | | | | | | | | | Nominal | | | | | | | | | | | | | (Million in | | | | | | | | | | Nominal | | | Transaction | | | Transaction | | | | | | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged | | | | | | | | | | | | | | IRS | | | 2,333 | | | 2,333 | | | Peso | | | Loans - Interest rate risk | | | | | | | | | | | | | | IRS | | | 1,000 | | | 1,000 | | | Peso | | | Promissory notes - Interest rate risk | | | | | | | | | | | | | | IRS | | | 47,047 | | | 47,047 | | | Peso | | | M Bonds - Interest rate risk | | | | | | | | | | | | | | CCS | | | 265 | | | 13 | | | Euro | | | Loans - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 16 | | | 1 | | | USD | | | Loans - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 23,431 | | | 1,089 | | | Euro | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 7,824 | | | 398 | | | USD | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 1,492 | | | 58 | | | Pound sterling | | | UMS - Interest rate and foreign exchange risk | | | | | | | | | | | | | | CCS | | | 1,895 | | | 405 | | | UDI | | | UDIBONDS - Interest rate and inflation risk | | | | | | | | | | | | | |
The fair value hedges carried out by the Bank are extended in certain cases up to the year 2034.
For 2018, 2019 and 2020, the effect of valuation for the period of financial derivative instruments for fair value hedging purposes recognized in the consolidated income statement under Gains/(losses) on financial assets and liabilities (net) is 474 million pesos, (667) million pesos and (6,884) million pesos, respectively (see Note 39).
For 2018, 2019 and 2020, the effect of valuation arising from the risk being hedged of the hedged items for fair value hedging purposes recognized in the consolidated income statement in Gains/(losses) on financial assets and liabilities (net) is (606) million pesos, 731 million pesos and 6,427 million pesos, respectively (see Note 39).
Each of these hedging financial derivative instruments is presented in the consolidated balance sheet under Hedging derivatives.
Cash flow hedges
As of December 31, 2019, the positions in financial derivatives for cash flow hedging purposes are as follows:
| | | | | | | | | | | | | | | | | | | Nominal | | | | | | | | | | | | | (Million in | | | | | | | | | | Nominal | | | Transaction | | | Transaction | | | | | | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged | | | | | | | | | | | | | | IRS | | | 11,311 | | | 11,311 | | | Peso | | | Unsecured notes - Interest rate risk | | | | | | | | | | | | | | CCS | | | 2,830 | | | 150 | | | USD | | | Unsecured notes - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 2,358 | | | 166 | | | USD | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 1,854 | | | 104 | | | Euro | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 777 | | | 34 | | | Pound sterling | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 10,234 | | | 543 | | | USD | | | Senior Unsecured Notes - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 2,657 | | | 136 | | | Euro | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 260 | | | 10 | | | Pound sterling | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 911 | | | 50 | | | USD | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | Forward Fx-BRL | | | 32,372 | | | 6,919 | | | BRL | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | | Forward Fx-USD | | | 37,743 | | | 1,726 | | | USD | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | |
As of December 31, 2020, the positions in financial derivatives for cash flow hedging purposes are as follows:
| | | | | | | | | | | | | | | | | | | Nominal | | | | | | | | | | | | | (Million in | | | | | | | | | | Nominal | | | Transaction | | | Transaction | | | | | | | (Million Pesos) | | | Currency) | | | Currency | | | Hedged Item and Risk Hedged | | | | | | | | | | | | | | IRS | | | 11,311 | | | 11,311 | | | Peso | | | Unsecured notes - Interest rate risk | | | | | | | | | | | | | | CCS | | | 872 | | | 69 | | | USD | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 655 | | | 39 | | | Euro | | | Loans - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 10,800 | | | 543 | | | USD | | | Senior Unsecured Notes - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 2,284 | | | 116 | | | Euro | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 260 | | | 10 | | | Pound sterling | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | CCS | | | 911 | | | 50 | | | USD | | | UMS - Foreign exchange risk | | | | | | | | | | | | | | Forward Fx-BRL | | | 22,644 | | | 6,662 | | | BRL | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | | Forward Fx-USD | | | 32,122 | | | 1,137 | | | USD | | | Brazilian Government Notes - Foreign exchange risk | | | | | | | | | | | | | |
During October 2018, the Bank discontinued a cash flow hedge of Tier II Subordinated Capital Notes for an amount of 1,045 million USD (nominal value).
As of December 31, 2019 and 2020, included in other comprehensive income under Valuation adjustments – Cash flow hedges, are 17 million pesos and (13) million pesos (see Note 28), respectively, which refer to the accumulated unamortized gain (net of the related deferred tax effect) of hedging financial derivatives for which hedge accounting was discontinued. Such balances are being reclassifiedhas been calculated based on the original terms offollowing formula over the forecast transactions. The term of such reclassifying extends through the year 2022. The remaining amount of Valuation adjustments – Cash flow hedges reflected in other comprehensive income consists of accumulated unrealized gain or loss on effectivelast cash flow hedges currently in effect.
Theestimated [D*(1+g)//i-g)]*(1+i)˄-n, where:
|
| ● | D = Last estimated cash flow, hedges entered into by the Bank are extended in certain cases up to the |
| ● | g = Perpetual growth (0%), |
| ● | n= Number of year 2022 for Senior Unsecured Notes, up to the year 2025 for Brazilian Government Notes, up to the year 2025 for Loans and advances to customers and up to the year 2026 for UMS.
A reconciliation of Valuation adjustments – Cash flow hedges is as follows:
| | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Balance at January 1 | | | 356 | | | (290) | | | (276) | | Valuation adjustments | | | (882) | | | 29 | | | (376) | | Amounts recycled to consolidated income statement | | | (40) | | | (9) | | | (43) | | Of which: | | | | | | | | | | | Income from cash flow hedging financial derivatives and discontinued cash flow hedge accounting | | | (42) | | | (11) | | | (43) | | Cash flow hedges ineffectiveness (Note 39) | | | 2 | | | 2 | | | — | | Income taxes | | | 276 | | | (6) | | | 126 | | Balance at December 31 | | | (290) | | | (276) | | | (569) | |
As of December 31, 2020, the breakdown of thelast estimated cash flowsflow.
|
| (3) | The Cost of the cash flow hedges that are expected to be reclassified from other comprehensive income to the consolidated income statement is as follows: | | | | | | | | | | | | | | | | | | | | | | | Between 3 Months and | | | Between 1 Year and 5 | | | | | | | | | | | Less than 3 Months | | | 1 Year | | | Years | | | More than 5 Years | | | Total | | | | | | | | | | | | | | | | | | | Cash flows to be received | | | 264 | | | 698 | | | 739 | | | 1 | | | 1,702 | | Cash flows to be paid | | | (670) | | | (884) | | | (959) | | | (2) | | | (2,515) | |
Note 45.a contains a breakdown of the remaining maturity periods of hedging financial derivatives.
13. Non-current assets held for sale
a) Breakdown
As of December 31, 2019 and 2020, non-current assets held for sale consist of foreclosed assets that amounted to 935 million pesos and 551 million pesos, respectively.
In 2018, 2019 and 2020, the Bank recognized a gain of 38 million pesos, a gain of 42 million pesos and a gain of 9 million pesos, respectively, under Gains/(losses) on disposal of non-current assets held for sale not classified as discontinued operations (net) in the consolidated income statement.
For the year ended December 31, 2018, 2019 and 2020 the Bank recognized an impairment loss of 5 million pesos, 370 million pesos and 119 million pesos, respectively under Impairment losses on other assets (net) in the consolidated income statement.
b) Changes
The changes in foreclosed assets in the consolidated balance sheet were as follows:
| | | | |
|
|
| Foreclosed Assets
|
|
|
|
|
|
| Cost:
| |
| |
| Balances at January 1, 2019
| |
| 1,277
|
| Additions
| |
| 146
|
| Disposals
| |
| (118)
|
| Impairment losses
| |
| (370)
|
| Balances at December 31, 2019
|
|
| 935
|
| Additions
| |
| 172
|
| Disposals
| |
| (437)
|
| Impairment losses
| |
| (119)
|
| Balances at December 31, 2020
|
|
| 551
|
|
14. Tangible assets
a) Changes
The changes in Tangible assets in the consolidated balance sheet were as follows:
| | | | |
|
|
| Tangible Assets
| |
|
|
|
|
| Cost:
| |
| |
| Balances at January 1, 2019
| |
| 16,828
|
| Additions
| |
| 3,208
|
| Disposals
| |
| (207)
|
| Balances at December 31, 2019
|
|
| 19,829
|
| Additions
| |
| 3,429
|
| Disposals
| |
| (171)
|
| Balances at December 31, 2020
|
|
| 23,087
|
|
|
|
|
|
| Accumulated depreciation:
| |
| |
| Balances at January 1, 2019
| |
| (8,114)
|
| Additions
| |
| (1,378)
|
| Disposals
| |
| 205
|
| Balances at December 31, 2019
|
|
| (9,287)
|
| Additions
| |
| (1,766)
|
| Disposals
| |
| 172
|
| Balances at December 31, 2020
|
|
| (10,881)
|
|
|
|
|
|
| Balances at December 31, 2019
|
|
| 10,542
|
| Balances at December 31, 2020
|
|
| 12,206
|
|
As of December 31, 2020, there are no restrictions on title and no tangible assets haveEquity has been pledged as collateral for liabilities.
b) Breakdown by asset class
| | | | | | | | | | | | | | | | Accumulated | | | | | | | Cost | | | Depreciation | | | Carrying Amount | | | | | | | | | | | Buildings | | | 11,724 | | | (5,826) | | | 5,898 | IT equipment and fixtures | | | 4,776 | | | (2,000) | | | 2,776 | Furniture and vehicles | | | 2,627 | | | (1,461) | | | 1,166 | Other fixtures | | | 702 | | | — | | | 702 | Balances at December 31, 2019 | | | 19,829 | | | (9,287) | | | 10,542 | | | | | | | | | | | Buildings | | | 13,125 | | | (6,631) | | | 6,494 | IT equipment and fixtures | | | 6,059 | | | (2,594) | | | 3,465 | Furniture and vehicles | | | 3,217 | | | (1,656) | | | 1,561 | Other fixtures | | | 686 | | | — | | | 686 | Balances at December 31, 2020 | | | 23,087 | | | (10,881) | | | 12,206 |
15. Leases
a) Right-of-use assets
Lease information with the Bank as lessee is as follows:
| | | | | | | | | | | | | | | Branch | | | IT | | | Furniture | | | | | | offices | | | equipment | | | and vehicles | | Total | Balances at January 1, 2019 | | | 6,691 | | | 12 | | | 31 | | 6,734 | Remeasurement of right-of-use assets | | | (684) | | | — | | | — | | (684) | Additions in right-of-use assets | | | 957 | | | — | | | — | | 957 | Depreciation | | | (1,381) | | | (3) | | | (12) | | (1,396) | Balances at December 31, 2019 | | | 5,583 | | | 9 | | | 19 | | 5,611 | Remeasurement of right-of-use assets | | | 214 | | | — | | | — | | 214 | Additions in right-of-use assets | | | 1,079 | | | — | | | 244 | | 1,323 | Depreciation | | | (1,419) | | | (2) | | | (55) | | (1,476) | Disposals | | | (22) | | | (7) | | | — | | (29) | Balances at December 31, 2020 | | | 5,435 | | | — | | | 208 | | 5,643 |
b) Lease liabilities
Following is an analysis of activity in lease liabilities as of December 31, 2020:
| | | |
|
|
| Amount
|
|
|
|
| Balances at January 1, 2019
| | | 6,734
| Interest expense
|
|
| 729
| New contracts
|
|
| 957
| Remeasurement on leases liabilities
|
|
| (684)
| Payments
|
|
| (1,817)
| Balances at December 31, 2019
|
|
| 5,919
| Interest expense
|
|
| 679
| New contracts
|
|
| 1,271
| Remeasurement on leases liabilities
|
|
| 198
| Disposals
|
|
| (29)
| Payments
|
|
| (1,907)
| Balances at December 31, 2020
|
|
| 6,131
|
The following table sets out a maturity analysis of lease payments:
| | | |
|
|
| December 31, 2020
| Maturity analysis - contractual undiscounted cash flows
| | |
| Less than one year
|
|
| 1,219
| One to three years
|
|
| 2,403
| Three to five years
|
|
| 1,801
| More than five years
|
|
| 3,016
| Total undiscounted lease liabilities at December 31, 2020
|
|
| 8,439
| Lease liabilities at December 31, 2020
|
|
| 6,131
|
|
|
|
| Current
|
|
| 975
| Long-term
|
|
| 5,156
|
c) Leaseback
In the second quarter of 2012, the Bank entered into an agreement with a non-related party, Fibra Uno, S.A. de C.V. (hereinafter, “Fibra Uno”) regarding the sale of 220 properties (branches, offices and parking spaces) and the subsequent leaseback thereof for a term of 20 years.
The corresponding lease contract is non-cancellable and includes an option to renew up to an additional four consecutive periods of five years each with a market rate to be determined on the date of the renewal. The lease agreement includes rent adjustmentscalculated based on the INPCfollowing formula Rf+(ß*Pr), where:
|
| ● | Rf = Risk free rate (9.08%), |
| ● | β = Beta (0.909), and does not contain volume-based or leveraged contingent rent payment clauses or purchase options, or impose any restrictions |
| ● | Pr = Equity Risk Premium (9.23%). |
| (4) | The Cost of Debt has been calculated based on the Bank’s ability to pay dividends, engage in debtactual pre-tax financing transactions or enter into further lease agreements. Because this was a sale and operating leaseback under IAS 17,cost of the Bank. |
| (5) | The Equity Structure has been calculated based on the following formula: Equity/(Total Liability+Equity). The Debt Structure has been calculated based on the following formula: Debt/(Total Liability+Equity). |
| (6) | The Discount rate has been calculated based on the following formula: (Cost of Equity*Equity Structure) + (Cost of Debt*Debt Structure). |
The assumptions used in performing the interim impairment test were updated to reflect the best approximation of market behavior. As of December 2021 and 2022, the recoverable value of the CGU is higher than its book value. Based on the foregoing, and in accordance with the estimates, projections and measurements available to the Bank’s Management in 2020, 2021 and 2022, the Bank has not recognized any impairment losses on Goodwill. 17. Intangible assets - Other intangible assets a) Changes The changes in Other intangible assets in the consolidated balance sheet were as follows: | | | | | |
|
| Intangible Assets |
| | | | with Finite Useful Life | | | | | | | Cost: | | | | | Balances at the date of initial application of IFRS 16 the Bank accounts for the leaseback in the same way as it accounts for its leases of other operating lease contracts.January 1, 2021 | F-144
| Table of Contents
| d) Additional information19,237
| | | |
|
|
| December 31, 2020
| Amounts recognized in the consolidated income statement:
|
|
|
| Interest on lease liabilities
|
|
| 679
| Expense relating to short-term leases
|
|
| 108
| Expense relating to leases of low-value assets that are not shown above as short-term leases
|
|
| 94
| Expense relating to variable lease payments not included in lease liabilities
|
|
| —
| Cash flows from lease liabilities:
|
|
|
| Total cash flows
|
|
| (2,109)
| |
| Additions | | | 3,371 | | Disposals | | | (344) | | 16. Intangible assets – Goodwill
As ofBalances at December 31, 20192021
|
| | 22,264 | | Additions | | | 3,940 | | Disposals | | | — | | Balances at December 31, 2022 |
| | 26,204 | | | | | | | Accumulated amortization and 2020, Goodwill amounted to 1,734 million pesos.impairment: | a) Impairment test
| The main assumptions used in the calculation of the impairment of Goodwill are as follows:
|
|
| | | Balances at January 1, 2021 | | | (12,364) | | Additions | | | (2,566) | | Disposals | | | 343 | | Balances at December 31, 2021 |
| | (14,587) | | Additions | | | (2,670) | | Disposals | | | — | | Balances at December 31, 2022 |
| | (17,257) | | Balances at December 31, 2021 |
| | 7,677 | | Balances at December 31, 2022 |
| | 8,947 | |
|
|
| Hypotheses
|
|
|
|
| Basis of valuation
| |
| Value in use: discounted cash flows
| Period of projection of cash flows(1)
| |
| 10 years
| Perpetual cash flow
| |
| (2)
| Discount rate(6)
| |
| 7.54%
| Of which:
| |
| | Cost of Equity(3)
|
|
| 11.23%
| Cost of Debt(4)
|
|
| 5.27%
| Equity Structure(5)
|
|
| 38% Equity / 62% Debt
|
b) Breakdown The breakdown of Other intangible assets in the consolidated balance sheet is as follows: | | | | | | | | | | | | | | | | Estimated | | | | | | Accumulated | | | Carrying | | | | Useful Life | | | Cost | | | Amortization | | | Amount | IT developments | | | 3 years | | | 22,176 | | | (14,536) | | | 7,640 | Others | | | 10 years | | | 88 | | | (51) | | | 37 | Balances at December 31, 2021 | | | | | | 22,264 | | | (14,587) | | | 7,677 | | | | | | | | | | | | | | IT developments | | | 3 years | | | 26,117 | | | (17,198) | | | 8,919 | Others | | | 10 years | | | 87 | | | (59) | | | 28 | Balances at December 31, 2022 | | | | | | 26,204 | | | (17,257) | | | 8,947 |
As of December 31, 2021 and 2022, there are no intangible assets with restricted title or intangible assets pledged as security for liabilities. (1) | The period of projections of cash flow are prepared using internal budgets and growth plans of Banks’ Management, based on historical data, market expectations and conditions such as industry growth and inflation. |
(2) | The perpetual cash flow has been calculated based on the following formula over the last cash flow estimated [D*(1+g)//i-g)]*(1+i)^-n, where: |
| ● | D = Last estimated cash flow, |
| ● | g = Perpetual growth (0%), |
| ● | n= Number of year of last estimated cash flow. |
(3) | The Cost of Equity has been calculated based on the following formula Rf+(ß*Pr), where: |
| ● | Rf = Risk free rate (6.26%), |
| ● | Pr = Equity Risk Premium (6.38%). |
18. Other assets The breakdown of Other assets is as follows: | | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Credit and debit card operating balances | | | 2,421 | | | 1,341 | Insurance commission receivables | | | 1,436 | | | 1,682 | Prepaid expenses | | | 812 | | | 681 | Other | | | 5,457 | | | 7,477 | | | | 10,126 | | | 11,181 |
The following is a breakdown by maturity of Other assets as of December 31, 2022: | | | | | | | | | | | | | | | | | | | Current | | | More than 30 days less than 60 | | | More than 60 days less than 90 | | | More than 90 days | | | Total | | | | | | | | | | | | | | | | | Credit and debit card operating balances | | | 1,220 | | | 66 | | | 39 | | | 16 | | | 1,341 | Insurance commission receivables | | | 129 | | | 60 | | | 84 | | | 1,409 | | | 1,682 | Prepaid expenses | | | 681 | | | — | | | — | | | — | | | 681 | Other | | | 5,456 | | | 1,200 | | | 349 | | | 1,644 | | | 8,649 | | | | | | | | | | | | | | | | | Expected credit loss rate | | | 4% | | | 0% | | | 7% | | | 28% | | | | Gross carrying amount | | | 7,486 | | | 1,326 | | | 472 | | | 3,069 | | | 12,353 | Lifetime expected credit losses | | | (269) | | | (5) | | | (33) | | | (865) | | | (1,172) | | | | | | | | | | | | | | | | | Balances at December 31, 2022 | | | 7,217 | | | 1,321 | | | 439 | | | 2,204 | | | 11,181 |
(4) | The Cost of Debt has been calculated based on the actual pretax financing cost of the Bank. |
(5) | The Equity Structure has been calculated based on the following formula: Equity/(Total Liability+Equity). The Debt Structure has been calculated based on the following formula: Debt/(Total Liability+Equity). |
(6) | The Discount rate has been calculated based on the following formula: (Cost of Equity*Equity Structure) + (Cost of Debt*Debt Structure). |
In addition to the impairment test performed annually and having considered the unprecedented uncertainty created by COVID-19 pandemic and its potential impact on the carrying value of goodwill, Bank’s Management performed an interim impairment test as of September 30, 2020. The Bank did not recognize any impairment losses on Goodwill on such date.
The assumptions used in performing the interim impairment test were updated to reflect lower budgeted earnings in the next years and a delay in the return to the pre-crisis levels of turnover and profitability.
Based on the foregoing, and in accordance with the estimates, projections and measurements available to the Bank’s Management in 2018, 2019 and 2020, the Bank has not recognized any impairment losses on Goodwill.
17. Intangible assets - Other intangible assets
a) Changes
The changes in Other intangible assets in the consolidated balance sheet were as follows:
| | | | |
|
|
| Intangible Assets
|
|
|
|
| with Finite Useful Life
|
|
|
|
|
|
| Cost:
| |
| |
| Balances at January 1, 2019
| |
| 13,753
|
| Additions
| |
| 3,236
|
| Disposals
| |
| —
|
| Balances at December 31, 2019
|
|
| 16,989
|
| Additions
| |
| 2,248
|
| Disposals
| |
| —
|
| Balances at December 31, 2020
|
|
| 19,237
|
|
|
|
|
|
| Accumulated amortization and impairment:
| |
| |
| Balances at January 1, 2019
| |
| (7,443)
|
| Additions
| |
| (2,448)
|
| Disposals
| |
| —
|
| Balances at December 31, 2019
|
|
| (9,891)
|
| Additions
| |
| (2,473)
|
| Disposals
| |
| —
|
| Balances at December 31, 2020
|
|
| (12,364)
|
| Balances at December 31, 2019
|
|
| 7,098
|
| Balances at December 31, 2020
|
|
| 6,873
|
|
b) Breakdown
The breakdown of Other intangible assets in the consolidated balance sheet is as follows:
| | | | | | | | | | | | | | | | Estimated | | | | | | Accumulated | | | Carrying | | | | Useful Life | | | Cost | | | Amortization | | | Amount | IT developments | | | 3 years | | | 16,903 | | | (9,858) | | | 7,045 | Others | | | 10 years | | | 86 | | | (33) | | | 53 | Balances at December 31, 2019 | | | | | | 16,989 | | | (9,891) | | | 7,098 | | | | | | | | | | | | | | IT developments | | | 3 years | | | 19,149 | | | (12,323) | | | 6,826 | Others | | | 10 years | | | 88 | | | (41) | | | 47 | Balances at December 31, 2020 | | | | | | 19,237 | | | (12,364) | | | 6,873 |
As of December 31, 2019 and 2020, there are no intangible assets with restricted title or intangible assets pledged as security for liabilities.
18. Other assets
The breakdown of Other assets is as follows:
| | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Credit and debit card operating balances | | | 2,577 | | | 2,337 | Insurance commission receivables | | | 1,278 | | | 1,672 | Prepaid expenses | | | 695 | | | 974 | Other | | | 6,623 | | | 10,776 | | | | 11,173 | | | 15,759 |
The following is a breakdown by maturity of Other assets that are measured at amortized cost as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | Current | | | More than 30 days less than 60 | | | More than 60 days less than 90 | | | More than 90 days | | | Total | | | | | | | | | | | | | | | | | Other assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit and debit card operating balances | | | 2,130 | | | 101 | | | 30 | | | 76 | | | 2,337 | Insurance commission receivables | | | 59 | | | 198 | | | 187 | | | 1,228 | | | 1,672 | Prepaid expenses | | | 968 | | | — | | | — | | | 6 | | | 974 | Other | | | 4,577 | | | 2,303 | | | 2,397 | | | 2,434 | | | 11,711 | | | | | | | | | | | | | | | | | Expected credit loss rate | | | 4% | | | 2% | | | 1% | | | 13% | | | | Gross carrying amount | | | 7,734 | | | 2,602 | | | 2,614 | | | 3,744 | | | 16,694 | Lifetime expected credit losses | | | (339) | | | (55) | | | (37) | | | (504) | | | (935) | | | | | | | | | | | | | | | | | Balances at December 31, 2020 | | | 7,395 | | | 2,547 | | | 2,577 | | | 3,240 | | | 15,759 |
19. Deposits from the Central Bank and Deposits from credit institutions The breakdown by classification, type and currency of Deposits from the Central Bank and Deposits from credit institutions is as follows:
| | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Classification: | | | | | | | Other financial liabilities at fair value through profit or loss | | | 141,263 | | | 79,859 | Financial liabilities at amortized cost | | | 72,969 | | | 187,503 | | | | 214,232 | | | 267,362 | Type: | | | | | | | Reciprocal accounts | | | 7,272 | | | 9,418 | Time deposits | | | 8,914 | | | 5,538 | Overnight deposits | | | 26,710 | | | 23,826 | Repurchase agreements | | | 141,263 | | | 206,188 | Other accounts | | | 29,961 | | | 22,329 | Of which: | | | | | | | Collateral received for OTC financial derivatives transactions (Note 32) | | | 8,960 | | | — | Others | | | 21,001 | | | 22,329 | Accrued interest | | | 112 | | | 63 | | | | 214,232 | | | 267,362 | Currency: | | | | | | | Peso | | | 195,604 | | | 239,831 | USD | | | 18,565 | | | 27,494 | Other currencies | | | 63 | | | 37 | | | | 214,232 | | | 267,362 |
Note 45.a includes a breakdown of the remaining maturity periods of Deposits from the Central Bank and Deposits from credit institutions. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Deposits from the Central Bank and Deposits from credit institutions – Financial liabilities at amortized cost.
20. Customer deposits
The breakdown by classification, type and currency of the balance of Customer deposits is as follows:
| | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Classification: | | | | | | | Other financial liabilities at fair value through profit or loss | | | 129,216 | | | 130,292 | Financial liabilities at amortized cost | | | 630,055 | | | 742,201 | | | | 759,271 | | | 872,493 | Type: | | | | | | | Repurchase agreements | | | 129,216 | | | 138,616 | Demand deposits: | | | | | | | Current accounts | | | 424,563 | | | 499,458 | Other deposits | | | 24,010 | | | 43,860 | Of which: | | | | | | | Collateral received for OTC financial derivatives transactions (Note 32) | | | 7,799 | | | 23,052 | Others | | | 16,211 | | | 20,808 | Time deposits: | | | | | | | Fixed-term deposits | | | 179,768 | | | 189,686 | Accrued interest | | | 1,714 | | | 873 | | | | 759,271 | | | 872,493 | Currency: | | | | | | | Peso | | | 677,634 | | | 785,713 | USD | | | 81,631 | | | 86,780 | Other currencies | | | 6 | | | — | | | | 759,271 | | | 872,493 |
As of December 31, 2019 and 2020, Customer deposits of 7,799 million pesos and 23,052 million pesos, respectively, have been received in connection with OTC financial derivatives transactions (see Note 32).
Note 45.a includes a breakdown of the remaining maturity periods of Customer deposits. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Customer deposits – Financial liabilities at amortized cost.
21. Marketable debt securities
a) Breakdown
The breakdown by classification, type and currency of issue of Marketable debt securities is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Classification: | | | | | | | Other financial liabilities at fair value through profit or loss | | | 3,246 | | | 1,363 | Financial liabilities at amortized cost | | | 111,211 | | | 130,754 | | | | 114,457 | | | 132,117 | Type: | | | | | | | Certificates of deposit (unsecured) | | | 37,823 | | | 34,544 | Senior Unsecured Notes | | | 18,849 | | | 55,076 | Structured bank bonds | | | 4,797 | | | 2,139 | Promissory notes | | | 23,314 | | | 16,924 | Unsecured bonds | | | 29,674 | | | 23,434 | | | | 114,457 | | | 132,117 | Currency: | | | | | | | Peso | | | 89,233 | | | 76,242 | USD | | | 25,224 | | | 55,875 | | | | 114,457 | | | 132,117 |
Note 45.a includes a breakdown of the remaining maturity periods of Marketable debt securities. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Marketable debt securities – Financial liabilities at amortized cost.
The breakdown by classification, type and currency of Deposits from the Central Bank and Deposits from credit institutions is as follows: | | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Classification: | | | | | | | Financial liabilities at fair value through profit or loss | | | 40,848 | | | 53,873 | Financial liabilities at amortized cost | | | 169,955 | | | 164,110 | | | | 210,803 | | | 217,983 | Type: | | | | | | | Reciprocal accounts | | | 13,373 | | | 12,870 | Time deposits | | | 5,471 | | | 3,559 | Overnight deposits | | | 26,164 | | | 13,589 | Repurchase agreements | | | 132,621 | | | 152,629 | Other accounts | | | 33,072 | | | 35,258 | Of which: | | | | | | | Collateral received for OTC financial derivatives transactions (Note 32) | | | 26,919 | | | 24,720 | Others | | | 6,153 | | | 10,538 | Accrued interest | | | 102 | | | 78 | | | | 210,803 | | | 217,983 | Currency: | | | | | | | Peso | | | 177,336 | | | 187,050 | USD | | | 33,424 | | | 30,902 | Other currencies | | | 43 | | | 31 | | | | 210,803 | | | 217,983 |
As of December 31, 2022, Deposits from credit institutions of 24,720 million pesos, have been received in connection with OTC financial derivatives transactions (see Note 32). Note 45.a includes a breakdown of the remaining maturity periods of Deposits from the Central Bank and Deposits from credit institutions. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Deposits from the Central Bank and Deposits from credit institutions – Financial liabilities at amortized cost. 20. Customer deposits The breakdown by classification, type and currency of the balance of Customer deposits is as follows: | | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Classification: | | | | | | | Financial liabilities at fair value through profit or loss | | | 114,078 | | | 119,769 | Financial liabilities at amortized cost | | | 777,886 | | | 808,529 | | | | 891,964 | | | 928,298 | Type: | | | | | | | Repurchase agreements | | | 131,639 | | | 146,691 | Demand deposits: | | | | | | | Current accounts | | | 541,257 | | | 538,409 | Other deposits | | | 22,760 | | | 22,972 | Of which: | | | | | | | Collateral received for OTC financial derivatives transactions (Note 32) | | | — | | | 2,141 | Others | | | 22,760 | | | 20,831 | Time deposits: | | | | | | | Fixed-term deposits | | | 195,431 | | | 218,316 | Accrued interest | | | 877 | | | 1,910 | | | | 891,964 | | | 928,298 | Currency: | | | | | | | Peso | | | 798,976 | | | 833,323 | USD | | | 92,987 | | | 94,975 | Other currencies | | | 1 | | | — | | | | 891,964 | | | 928,298 |
As of December 31, 2022 and 2021, there were no transactions in connection with OTC financial derivatives transactions (see Note 32). Note 45.a includes a breakdown of the remaining maturity periods of Customer deposits. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Customer deposits – Financial liabilities at amortized cost. 21. Marketable debt securities a) Breakdown The breakdown by classification, type and currency of issue of Marketable debt securities is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Classification: | | | | | | | Financial liabilities at fair value through profit or loss | | | 259 | | | 520 | Financial liabilities at amortized cost | | | 101,423 | | | 134,393 | | | | 101,682 | | | 134,913 | Type: | | | | | | | Certificates of deposit (unsecured) | | | 2,628 | | | 36,426 | Senior Unsecured Notes | | | 56,801 | | | 34,469 | Structured bank bonds | | | 981 | | | 2,851 | Promissory notes | | | 13,543 | | | 25,988 | Unsecured bonds | | | 27,729 | | | 35,179 | | | | 101,682 | | | 134,913 | Currency: | | | | | | | Peso | | | 44,687 | | | 99,189 | USD | | | 56,995 | | | 35,724 | | | | 101,682 | | | 134,913 |
Note 45.a includes a breakdown of the remaining maturity periods of Marketable debt securities. In addition, Note 45.d contains the fair value amounts of these liabilities classified as Marketable debt securities – Financial liabilities at amortized cost. b) Changes in Marketable debt securities classified as Financial liabilities at fair value through profit or loss The changes in Marketable debt securities classified as Financial liabilities at fair value through profit or loss were as follows: | | | | | | | | | | | 2021 | | | 2022 | | | | | | | | | | Beginning balance | | | 1,363 | | | 259 | | Issues | | | 197 | | | 471 | | Of which: | | | | | | | | Structured bank bonds | | | 197 | | | 471 | | Of which: | | | | | | | | Banco Santander México | | | 197 | | | 471 | | Redemptions | | | (1,315) | | | (169) | | Of which: | | | | | | | | Structured bank bonds | | | (1,315) | | | (169) | | Of which: | | | | | | | | Banco Santander México | | | (1,315) | | | (169) | | Changes in fair value | | | 14 | | | (41) | | Balance at year-end | | | 259 | | | 520 | |
c) Changes in Marketable debt securities classified as Financial liabilities at amortized cost The changes in Marketable debt securities classified as Financial liabilities at amortized cost were as follows: | | | | | | | | | | | 2021 | | | 2022 | | | | | | | | | | Beginning balance | | | 130,754 | | | 101,423 | | Issues | | | 1,197,521 | | | 1,601,167 | | Of which: | | | | | | | | Certificates of deposit (unsecured) | | | 3,347 | | | 36,475 | | Structured bank bonds | | | 20,880 | | | 26,711 | | Promissory notes | | | 1,163,294 | | | 1,523,091 | | Unsecured bonds | | | 10,000 | | | 14,890 | | Of which: | | | | | | | | Banco Santander México | | | 1,197,521 | | | 1,601,168 | | Redemptions | | | (1,228,486) | | | (1,565,677) | | Of which: | | | | | | | | Certificates of deposit (unsecured) | | | (35,156) | | | (2,824) | | Structured bank bonds | | | (20,956) | | | (25,135) | | Senior Unsecured Notes | | | — | | | (19,603) | | Promissory notes | | | (1,166,674) | | | (1,510,804) | | Unsecured bonds | | | (5,700) | | | (7,311) | | Of which: | | | | | | | | Banco Santander México | | | — | | | (1,565,677) | | Santander Vivienda | | | (1,228,486) | | | — | | Accrued interest | | | (42) | | | 131 | | Effect of changes in foreign exchange rates | | | 1,676 | | | (2,651) | | Balance at year-end | | | 101,423 | | | 134,393 | |
d) Other disclosures As of December 31, 2021, the balance of the issues performed by the Bank is as follows: | | | | | | | | | | | | | | Amount | | | Maturity Date | | | Rate | | | | | | | | | | | | Certificates of deposit (unsecured) | | | 500 | | | 01/21/2022 | | | 5.71 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 02/14/2022 | | | 5.22 | % | Certificates of deposit (unsecured) | | | 3 | | | 03/31/2022 | | | 5.00 | % | Certificates of deposit (unsecured) | | | 21 | | | 04/20/2022 | | | 5.47 | % | Certificates of deposit (unsecured) | | | 50 | | | 07/21/2022 | | | 5.19 | % | Certificates of deposit (unsecured) | | | 3 | | | 03/09/2022 | | | 0.01 | % | Certificates of deposit (unsecured) | | | 19 | | | 03/18/2022 | | | 0.01 | % | Certificates of deposit (unsecured) | | | 25 | | | 03/01/2022 | | | 0.01 | % | | | | 2,621 | | | | | | | | Accrued interest | | | 7 | | | | | | | | | | | 2,628 | | | | | | | | | | | | | | | | | | | Senior Unsecured Notes | | | 20,508 | | | 11/09/2022 | | | 4.13 | % | Senior Unsecured Notes | | | 35,888 | | | 04/17/2025 | | | 5.38 | % | | | | 56,396 | | | | | | | | Accrued interest | | | 405 | | | | | | | | | | | 56,801 | | | | | | | | | | | | | | | | | | | Structured bank bonds(*) | | | 7 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 2 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 56 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 2 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 39 | | | 11/16/2022 | | | TIIE | | Structured bank bonds(*) | | | 80 | | | 12/02/2022 | | | TIIE | | Structured bank bonds(*) | | | 57 | | | 01/21/2026 | | | TIIE | | Structured bank bonds(*) | | | 17 | | | 01/21/2026 | | | TIIE | | Structured bank bonds | | | 11 | | | 01/12/2022 | | | 9.69 | % | Structured bank bonds | | | 28 | | | 01/10/2022 | | | 8.61 | | Structured bank bonds | | | 10 | | | 01/10/2022 | | | 12.10 | % | Structured bank bonds | | | 45 | | | 01/12/2022 | | | 9.08 | % | Structured bank bonds | | | 45 | | | 01/25/2022 | | | 9.28 | % | Structured bank bonds | | | 56 | | | 06/24/2022 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 201 | | | 08/30/2022 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 52 | | | 09/27/2022 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 127 | | | 11/01/2022 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 31 | | | 01/04/2022 | | | 6.70 | % | Structured bank bonds | | | 62 | | | 01/06/2022 | | | 3.50 | % | Structured bank bonds | | | 31 | | | 01/12/2022 | | | 6.77 | % | Structured bank bonds | | | 10 | | | 01/18/2022 | | | 10.00 | % | Structured bank bonds | | | 10 | | | 01/21/2022 | | | 4.08 | % | | | | 979 | | | | | | | | Transaction costs and accrued interest (net) | | | 2 | | | | | | | | | | | 981 | | | | | | | | | | | | | | | | | | | Promissory notes | | | 76 | | | 01/04/2021 | | | 5.40 | % | Promissory notes | | | 6,000 | | | 01/15/2021 | | | 5.50 | % | Promissory notes | | | 5,900 | | | 01/15/2021 | | | 5.50 | % | Promissory notes | | | 1,000 | | | 01/15/2021 | | | 5.50 | % | Promissory notes | | | 20 | | | 03/16/2021 | | | 5.50 | % | Promissory notes | | | 500 | | | 01/13/2021 | | | 4.25 | % | | | | 13,496 | | | | | | | | Accrued interest | | | 47 | | | | | | | | | | | 13,543 | | | | | | | | | | | | | | | | | | | Unsecured bonds | | | 2,850 | | | 04/04/2022 | | | TIIE + 10 basis points | | Unsecured bonds | | | 4,461 | | | 05/06/2022 | | | TIIE + 15 basis points | | Unsecured bonds | | | 3,500 | | | 11/25/2025 | | | TIIE + 5 basis points | | Unsecured bonds | | | 7,150 | | | 03/30/2026 | | | 8.95 | % | Unsecured bonds | | | 3,000 | | | 09/01/2026 | | | 7.19 | % | Unsecured bonds | | | 6,500 | | | 11/21/2028 | | | 8.08 | % | | | | 27,461 | | | | | | | | Accrued interest | | | 268 | | | | | | | | | | | 27,729 | | | | | | | |
| (*) | Marketable debt securities classified as financial liabilities at fair value through profit or lossloss. The changes in Marketable debt securities classified as Financial liabilities at fair value through profit or loss were as follows:
|
| | | | | | | | | | | 2019 | | | 2020 | | | | | | | | | | Beginning balance | | | 4,750 | | | 3,246 | | Issues | | | 983 | | | 518 | | Of which: | | | | | | | | Structured bank bonds | | | 983 | | | 518 | | Of which: | | | | | | | | Banco Santander México | | | 983 | | | 518 | | Redemptions | | | (2,914) | | | (2,380) | | Of which: | | | | | | | | Structured bank bonds | | | (2,914) | | | (2,380) | | Of which: | | | | | | | | Banco Santander México | | | (2,914) | | | (2,380) | | Changes in fair value | | | 427 | | | (21) | | Balance at year-end | | | 3,246 | | | 1,363 | |
c) Changes in Marketable debt securities classified as Financial liabilities at amortized cost
The changes in Marketable debt securities classified as Financial liabilities at amortized cost were as follows:
| | | | | | | | | | | 2019 | | | 2020 | | | | | | | | | | Beginning balance | | | 98,312 | | | 111,211 | | Issues | | | 1,668,170 | | | 1,219,638 | | Of which: | | | | | | | | Certificates of deposit (unsecured) | | | 42,195 | | | 43,260 | | Structured bank bonds | | | 24,728 | | | 8,989 | | Senior Unsecured Notes | | | — | | | 41,827 | | Promissory notes | | | 1,591,247 | | | 1,125,562 | | Unsecured bonds | | | 10,000 | | | — | | Of which: | | | | | | | | Banco Santander México | | | 1,668,170 | | | 1,219,638 | | Redemptions | | | (1,654,767) | | | (1,193,956) | | Of which: | | | | | | | | Certificates of deposit (unsecured) | | | (26,883) | | | (46,436) | | Structured bank bonds | | | (23,765) | | | (9,751) | | Promissory notes | | | (1,604,004) | | | (1,131,578) | | Unsecured bonds | | | — | | | (6,191) | | Mortgage backed bonds | | | (115) | | | — | | Of which: | | | | | | | | Banco Santander México | | | (1,654,652) | | | (1,193,956) | | Santander Vivienda | | | (115) | | | — | | Accrued interest | | | 609 | | | (114) | | Effect of changes in foreign exchange rates | | | (1,113) | | | (6,025) | | Balance at year-end | | | 111,211 | | | 130,754 | |
d) Other disclosures
Issuance program
In April 2007, the Board of Directors authorized an issuance program for up to USD 4,000 million of different types of instruments denominated in pesos, USD, Euros or UDI, up to thirty years. In October 2010, the Board of Directors renewed this authorization.
In October 2011, the Board of Directors authorized to increase the amount of the issuance program up to USD 6,500 million. In October 2013, the Board of Directors endorsed the total amount of the issuance program, establishing that the maximum term of the issuances must be fifteen years.
In February 2017, the CNBV authorized an issuance of structured bank bonds, up to 10,000 million pesos with the maximum term of fifteen years.
In August 2019, the CNBV authorized an issuance program of structured bank bonds, up to 20,000 million pesos, with a maturity period of fifteen years.
On April 14, 2020, the Bank issued Senior Unsecured Notes for USD 1,750 million at an annual interest rate of 5.375% and maturity in 2025 (see Note 3).
As of December 31, 2019, the balance of the issues performed by the Bank under the aforementioned program is as follows:
| | | | | | | | | | | | | | Amount | | | Maturity Date | | | Rate | | | | | | | | | | | | Certificates of deposit (unsecured) | | | 1,000 | | | 12/16/2020 | | | 7.74 | % | Certificates of deposit (unsecured) | | | 500 | | | 12/16/2020 | | | 7.59 | % | Certificates of deposit (unsecured) | | | 300 | | | 12/11/2020 | | | 7.60 | % | Certificates of deposit (unsecured) | | | 700 | | | 12/11/2020 | | | 7.75 | % | Certificates of deposit (unsecured) | | | 1,100 | | | 11/09/2020 | | | 7.78 | % | Certificates of deposit (unsecured) | | | 500 | | | 09/24/2020 | | | 7.47 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 11/20/2020 | | | 7.72 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 10/26/2020 | | | 7.59 | % | Certificates of deposit (unsecured) | | | 2,500 | | | 10/08/2020 | | | 7.79 | % | Certificates of deposit (unsecured) | | | 250 | | | 09/30/2020 | | | 7.58 | % | Certificates of deposit (unsecured) | | | 200 | | | 09/15/2020 | | | 7.60 | % | Certificates of deposit (unsecured) | | | 1,150 | | | 09/11/2020 | | | 7.60 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 09/02/2020 | | | 7.76 | % | Certificates of deposit (unsecured) | | | 1,300 | | | 08/27/2020 | | | 7.64 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 07/09/2020 | | | 7.59 | % | Certificates of deposit (unsecured) | | | 500 | | | 09/25/2020 | | | 7.72 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 07/20/2020 | | | 7.89 | % | Certificates of deposit (unsecured) | | | 1,600 | | | 07/03/2020 | | | 7.94 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 06/30/2020 | | | 7.74 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 06/18/2020 | | | 7.81 | % | Certificates of deposit (unsecured) | | | 4,000 | | | 06/05/2020 | | | 7.74 | % | Certificates of deposit (unsecured) | | | 1,500 | | | 06/04/2020 | | | 7.59 | % | Certificates of deposit (unsecured) | | | 2,500 | | | 05/06/2020 | | | 7.76 | % | Certificates of deposit (unsecured) | | | 900 | | | 04/08/2020 | | | 7.95 | % | Certificates of deposit (unsecured) | | | 1,500 | | | 03/24/2020 | | | 7.59 | % | Certificates of deposit (unsecured) | | | 300 | | | 03/12/2020 | | | 7.75 | % | Certificates of deposit (unsecured) | | | 400 | | | 02/14/2020 | | | 7.59 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 02/11/2020 | | | 7.59 | % | Certificates of deposit (unsecured) | | | 125 | | | 02/10/2020 | | | 7.77 | % | Certificates of deposit (unsecured) | | | 400 | | | 02/07/2020 | | | 7.77 | % | Certificates of deposit (unsecured) | | | 300 | | | 02/13/2020 | | | 7.75 | % | Certificates of deposit (unsecured) | | | 50 | | | 01/22/2020 | | | 7.54 | % | Certificates of deposit (unsecured) | | | 1,100 | | | 01/10/2020 | | | 7.59 | % | Certificates of deposit (unsecured) | | | 400 | | | 01/10/2020 | | | 7.77 | % | Certificates of deposit (unsecured) | | | 1,550 | | | 01/08/2020 | | | 7.78 | % | Certificates of deposit (unsecured) | | | 13 | | | 03/03/2020 | | | 1.75 | % | Certificates of deposit (unsecured) | | | 13 | | | 05/15/2020 | | | 1.75 | % | | | | | | | | | | | | | | | 37,651 | | | | | | | | Accrued interest | | | 172 | | | | | | | | | | | 37,823 | | | | | | | | | | | | | | | | | | | Senior Unsecured Notes | | | 18,744 | | | 11/09/2022 | | | 4.125 | % | Accrued interest | | | 105 | | | | | | | | | | | 18,849 | | | | | | | | | | | | | | | | | | | Structured bank bonds(*) | | | 7 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 54 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 56 | | | 03/26/2021 | | | 9.50 | % | Structured bank bonds(*) | | | 6 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 159 | | | 03/08/2021 | | | 9.50 | % | Structured bank bonds(*) | | | 2 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 46 | | | 02/23/2021 | | | TIIE | | Structured bank bonds(*) | | | 30 | | | 05/24/2021 | | | TIIE | | Structured bank bonds(*) | | | 6 | | | 03/16/2021 | | | TIIE | | Structured bank bonds(*) | | | 212 | | | 11/09/2020 | | | Guaranteed rate subject to SXDP | | Structured bank bonds(*) | | | 294 | | | 04/23/2021 | | | TIIE | | Structured bank bonds(*) | | | 156 | | | 01/28/2021 | | | 10.00 | % | Structured bank bonds(*) | | | 441 | | | 10/26/2020 | | | Guaranteed rate subject to SXDP | | Structured bank bonds(*) | | | 773 | | | 10/23/2020 | | | TIIE | | Structured bank bonds(*) | | | 9 | | | 11/05/2020 | | | TIIE | | Structured bank bonds(*) | | | 114 | | | 06/26/2020 | | | Guaranteed rate subject to IPC | | Structured bank bonds(*) | | | 276 | | | 06/02/2020 | | | Guaranteed rate subject to EURO STOXX 50 | | Structured bank bonds(*) | | | 121 | | | 03/25/2020 | | | TIIE | | Structured bank bonds(*) | | | 137 | | | 03/23/2020 | | | TIIE | | Structured bank bonds(*) | | | 13 | | | 02/20/2020 | | | Guaranteed rate subject to EURO STOXX 50 | | Structured bank bonds(*) | | | 19 | | | 05/12/2021 | | | TIIE | | Structured bank bonds(*) | | | 5 | | | 03/03/2021 | | | Guaranteed rate subject to SXDP | | Structured bank bonds(*) | | | 24 | | | 03/03/2021 | | | Guaranteed rate subject to SXDP | | Structured bank bonds(*) | | | 180 | | | 12/14/2020 | | | Guaranteed rate subject to SXDP | | Structured bank bonds(*) | | | 115 | | | 11/23/2020 | | | Guaranteed rate subject to SXDP | | Structured bank bonds | | | 66 | | | 09/25/2020 | | | 2.50 | % | Structured bank bonds | | | 20 | | | 09/18/2020 | | | 2.50 | % | Structured bank bonds | | | 196 | | | 06/26/2020 | | | 4.00 | % | Structured bank bonds | | | 30 | | | 06/15/2020 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 19 | | | 03/27/2020 | | | 5.00 | % | Structured bank bonds | | | 50 | | | 03/27/2020 | | | 5.00 | % | Structured bank bonds | | | 11 | | | 02/20/2020 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 81 | | | 09/01/2020 | | | 2.50 | % | Structured bank bonds | | | 25 | | | 09/30/2020 | | | 2.50 | % | Structured bank bonds | | | 40 | | | 01/29/2020 | | | 12.00 | % | Structured bank bonds | | | 25 | | | 01/27/2020 | | | 12.00 | % | Structured bank bonds | | | 23 | | | 01/24/2020 | | | 10.00 | % |
Structured bank bonds | | | 500 | | | 01/21/2020 | | | 12.00 | % | Structured bank bonds | | | 105 | | | 01/17/2020 | | | 13.00 | % | Structured bank bonds | | | 15 | | | 01/16/2020 | | | 11.69 | % | Structured bank bonds | | | 114 | | | 01/16/2020 | | | 12.23 | % | Structured bank bonds | | | 19 | | | 01/16/2020 | | | 13.00 | % | Structured bank bonds | | | 10 | | | 01/16/2020 | | | 11.61 | % | Structured bank bonds | | | 27 | | | 01/14/2020 | | | 12.00 | % | Structured bank bonds | | | 12 | | | 01/10/2020 | | | 14.50 | % | Structured bank bonds | | | 40 | | | 01/07/2020 | | | 10.48 | % | Structured bank bonds | | | 57 | | | 01/03/2020 | | | 3.17 | % | Structured bank bonds | | | 57 | | | 01/03/2020 | | | 3.02 | % | | | | 4,797 | | | | | | | | Transaction costs and accrued interest (net) | | | - | | | | | | | | | | | 4,797 | | | | | | | | | | | | | | | | | | | Promissory notes | | | 500 | | | 11/30/2020 | | | 7.25 | % | Promissory notes | | | 2,000 | | | 10/05/2020 | | | 7.23 | % | Promissory notes | | | 1,500 | | | 04/15/2020 | | | 8.42 | % | Promissory notes | | | 1,500 | | | 04/13/2020 | | | 8.42 | % | Promissory notes | | | 1,000 | | | 03/20/2020 | | | 8.45 | % | Promissory notes | | | 921 | | | 03/19/2020 | | | 8.45 | % | Promissory notes | | | 500 | | | 03/17/2020 | | | 8.45 | % | Promissory notes | | | 500 | | | 03/09/2020 | | | 8.55 | % | Promissory notes | | | 200 | | | 02/17/2020 | | | 7.00 | % | Promissory notes | | | 2,700 | | | 01/17/2020 | | | 7.25 | % | Promissory notes | | | 70 | | | 01/06/2020 | | | 7.25 | % | Promissory notes | | | 11,500 | | | 01/03/2020 | | | 7.25 | % | | | | 22,891 | | | | | | | | Accrued interest | | | 423 | | | | | | | | | | | 23,314 | | | | | | | | | | | | | | | | | | | Unsecured bonds | | | 7,150 | | | 03/30/2026 | | | 8.95 | % | Unsecured bonds | | | 3,000 | | | 09/01/2026 | | | 7.19 | % | Unsecured bonds | | | 2,850 | | | 04/04/2022 | | | TIIE + 10 basis points | | Unsecured bonds | | | 4,461 | | | 05/06/2022 | | | TIIE + 15 basis points | | Unsecured bonds | | | 4,000 | | | 06/14/2021 | | | TIIE + 38 basis points | | Unsecured bonds | | | 1,700 | | | 03/09/2021 | | | 8.91 | % | Unsecured bonds | | | 6,224 | | | 02/10/2020 | | | LIBOR + 20 basis points | | | | | 29,385 | | | | | | | | Accrued interest | | | 289 | | | | | | | | | | | 29,674 | | | | | | | |
| (*)
| As of December 31, 2022, the balance of the issues performed by the Bank is as follows: | | | | | | | | | | | | | | Amount | | | Maturity Date | | | Rate | | | | | | | | | | | | Certificates of deposit (unsecured) | | | 2,500 | | | 11/13/2023 | | | 10.82 | % | Certificates of deposit (unsecured) | | | 2,500 | | | 10/13/2023 | | | 10.33 | % | Certificates of deposit (unsecured) | | | 1,100 | | | 09/14/2023 | | | 10.79 | % | Certificates of deposit (unsecured) | | | 3,000 | | | 08/17/2023 | | | 10.28 | % | Certificates of deposit (unsecured) | | | 1,500 | | | 08/17/2023 | | | 10.69 | % | Certificates of deposit (unsecured) | | | 50 | | | 07/20/2023 | | | 10.23 | % | Certificates of deposit (unsecured) | | | 300 | | | 06/22/2023 | | | 10.79 | % | Certificates of deposit (unsecured) | | | 1,100 | | | 06/14/2023 | | | 10.71 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 06/08/2023 | | | 10.74 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 06/07/2023 | | | 10.67 | % | Certificates of deposit (unsecured) | | | 3,000 | | | 06/02/2023 | | | 10.32 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 05/16/2023 | | | 9.98 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 05/16/2023 | | | 10.30 | % | Certificates of deposit (unsecured) | | | 3,000 | | | 05/05/2023 | | | 10.32 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 03/22/2023 | | | 10.71 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 03/01/2023 | | | 10.27 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 02/16/2023 | | | 10.71 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 02/02/2023 | | | 10.30 | % | Certificates of deposit (unsecured) | | | 850 | | | 02/03/2023 | | | 10.30 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 01/18/2023 | | | 10.69 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 01/13/2023 | | | 10.73 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 01/05/2023 | | | 10.28 | % | Certificates of deposit (unsecured) | | | 43 | | | 03/31/2023 | | | 2.00 | % | Certificates of deposit (unsecured) | | | 3 | | | 03/08/2023 | | | 2.20 | % | Certificates of deposit (unsecured) | | | 312 | | | 04/10/2023 | | | 0.10 | % | Certificates of deposit (unsecured) | | | 11 | | | 02/16/2023 | | | 2.20 | % | | | | 36,269 | | | | | | | | Accrued interest | | | 157 | | | | | | | | | | | 36,426 | | | | | | | | | | | | | | | | | | | Senior Unsecured Notes | | | 34,141 | | | 04/17/2025 | | | 5.38 | % | Accrued interest | | | 328 | | | | | | | | | | | 34,469 | | | | | | | |
| | | | | | | | | | | | | | Amount | | | Maturity Date | | | Rate | Structured bank bonds | | | 86 | | | 01/18/24 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 190 | | | 10/03/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 10 | | | 09/21/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 15 | | | 09/14/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 46 | | | 09/12/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 151 | | | 08/01/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 15 | | | 07/26/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 24 | | | 07/17/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 201 | | | 07/03/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 16 | | | 05/23/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 52 | | | 05/02/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 35 | | | 04/24/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 12 | | | 04/10/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 126 | | | 04/03/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 93 | | | 03/27/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 9 | | | 06/19/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 52 | | | 03/13/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 86 | | | 03/01/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 16 | | | 02/27/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 67 | | | 02/08/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 10 | | | 01/13/23 | | | 16.00 | % | Structured bank bonds | | | 78 | | | 02/07/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 39 | | | 01/30/23 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 10 | | | 01/06/23 | | | 14.00 | % | Structured bank bonds | | | 10 | | | 03/09/23 | | | 8.00 | % | Structured bank bonds | | | 88 | | | 02/07/23 | | | 11.20 | % | Structured bank bonds | | | 137 | | | 02/10/23 | | | 10.50 | % | Structured bank bonds | | | 38 | | | 01/18/23 | | | 5.50 | % | Structured bank bonds | | | 40 | | | 01/17/23 | | | 12.40 | % | Structured bank bonds | | | 10 | | | 01/04/23 | | | 8.00 | % | Structured bank bonds | | | 68 | | | 02/01/23 | | | 10.20 | % | Structured bank bonds | | | 29 | | | 01/05/23 | | | 8.90 | % | Structured bank bonds | | | 88 | | | 01/13/23 | | | 12.10 | % | Structured bank bonds | | | 12 | | | 01/06/23 | | | 14.50 | % | Structured bank bonds | | | 5 | | | 01/11/23 | | | 9.60 | % | Structured bank bonds | | | 10 | | | 01/06/23 | | | 19.40 | % | Structured bank bonds | | | 20 | | | 01/06/23 | | | 10.00 | % | Structured bank bonds | | | 88 | | | 01/06/23 | | | 10.85 | % | Structured bank bonds | | | 10 | | | 01/12/23 | | | 14.00 | % | Structured bank bonds | | | 10 | | | 01/17/23 | | | 10.95 | % | Structured bank bonds | | | 27 | | | 01/13/23 | | | 16.60 | % | Structured bank bonds | | | 10 | | | 01/06/23 | | | 11.45 | % | Structured bank bonds | | | 10 | | | 01/13/23 | | | 13.70 | % | Structured bank bonds | | | 20 | | | 01/05/23 | | | 9.00 | % | Structured bank bonds | | | 10 | | | 01/17/23 | | | 8.00 | % | Structured bank bonds | | | 26 | | | 01/13/23 | | | 13.00 | % | Structured bank bonds | | | 10 | | | 01/12/23 | | | 11.70 | % | Structured bank bonds | | | 10 | | | 01/05/23 | | | 11.45 | % | Structured bank bonds | | | 20 | | | 01/06/23 | | | 18.45 | % | Structured bank bonds | | | 19 | | | 01/06/23 | | | 16.90 | % | Structured bank bonds | | | 10 | | | 01/17/23 | | | 12.40 | % | Structured bank bonds | | | 20 | | | 01/05/23 | | | 33.80 | % | Structured bank bonds | | | 5 | | | 01/03/23 | | | 13.00 | % | Structured bank bonds | | | 10 | | | 01/13/23 | | | 12.25 | % | Structured bank bonds | | | 10 | | | 01/03/23 | | | 5.20 | % | Structured bank bonds | | | 17 | | | 01/21/26 | | | TIIE | | Structured bank bonds | | | 58 | | | 01/21/26 | | | TIIE | | Structured bank bonds | | | 23 | | | 02/21/25 | | | Invesco QQQ Trust Series 1 (QQQ) | | Structured bank bonds | | | 62 | | | 08/27/24 | | | Guaranteed rate subject to S&P 500 | | Structured bank bonds | | | 32 | | | 12/14/23 | | | Guaranteed rate subject to S&P 500 | | Structured bank bonds | | | 16 | | | 12/20/23 | | | Guaranteed rate subject to S&P 500 | | Structured bank bonds | | | 12 | | | 09/29/23 | | | Guaranteed rate subject to S&P 500 | | Structured bank bonds | | | 200 | | | 05/31/23 | | | TIIE | | Structured bank bonds | | | 114 | | | 03/07/23 | | | TIIE | | Structured bank bonds | | | 10 | | | 01/03/23 | | | Guaranteed rate subject to S&P 500 | | | | | 2,863 | | | | | | | | Transaction costs and accrued interest (net) | | | (12) | | | | | | | | | | | 2,851 | | | | | | | | | | | | | | | | | | | Promissory notes | | | 4,266 | | | 05/31/2023 | | | 10.91 | % | Promissory notes | | | 129 | | | 03/31/2023 | | | 8.37 | % | Promissory notes | | | 1,860 | | | 02/22/2023 | | | 7.44 | % | Promissory notes | | | 465 | | | 02/23/2023 | | | 7.44 | % | Promissory notes | | | 281 | | | 01/20/2023 | | | 7.40 | % | Promissory notes | | | 3,800 | | | 01/13/2023 | | | 10.50 | % | Promissory notes | | | 4,000 | | | 01/13/2023 | | | 10.50 | % | Promissory notes | | | 2,900 | | | 01/13/2023 | | | 10.50 | % | Promissory notes | | | 4,000 | | | 01/13/2023 | | | 10.50 | % | Promissory notes | | | 4,000 | | | 01/13/2023 | | | 10.50 | % | Promissory notes | | | 82 | | | 01/02/2023 | | | 10.40 | % | | | | 25,783 | | | | | | | | Accrued interest | | | 205 | | | | | | | | | | | 25,988 | | | | | | | | | | | | | | | | | | | Unsecured bonds | | | 5,000 | | | 07/09/2026 | | | TIIE + 29 basis points | | Unsecured bonds | | | 4,600 | | | 03/30/2026 | | | 8.95% | | Unsecured bonds | | | 6,500 | | | 11/21/2028 | | | 8.08% | | Unsecured bonds | | | 3,000 | | | 09/01/2026 | | | 7.19% | | Unsecured bonds | | | 2,550 | | | 03/30/2026 | | | 8.95% | | Unsecured bonds | | | 2,790 | | | 03/26/2029 | | | 8.72% | | Unsecured bonds | | | 7,100 | | | 03/29/2027 | | | TIIE + 7 basis points | | Unsecured bonds | | | 3,500 | | | 11/25/2025 | | | TIIE + 5 basis points | | | | | 35,040 | | | | | | | | Accrued interest | | | 139 | | | | | | | | | | | 35,179 | | | | | | | |
(*) Marketable debt securities classified as financial liabilities at fair value through profit or loss. |
As of December 31, 2020, the balance of the issues performed by the Bank under the aforementioned program is as follows:
| | | | | | | | | | | | | | Amount | | | Maturity Date | | | Rate | | | | | | | | | | | | Certificates of deposit (unsecured) | | | 1,000 | | | 12/03/2021 | | | 8.14 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 10/08/2021 | | | 8.14 | % | Certificates of deposit (unsecured) | | | 1,500 | | | 09/27/2021 | | | 8.14 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 10/11/2021 | | | 8.15 | % | Certificates of deposit (unsecured) | | | 1,200 | | | 09/13/2021 | | | 8.14 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 09/09/2021 | | | 8.16 | % | Certificates of deposit (unsecured) | | | 250 | | | 01/28/2021 | | | 8.16 | % | Certificates of deposit (unsecured) | | | 700 | | | 01/28/2021 | | | 8.15 | % | Certificates of deposit (unsecured) | | | 500 | | | 07/15/2021 | | | 8.15 | % | Certificates of deposit (unsecured) | | | 2,500 | | | 08/17/2021 | | | 8.15 | % | Certificates of deposit (unsecured) | | | 1,500 | | | 08/12/2021 | | | 8.17 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 08/19/2021 | | | 8.17 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 07/09/2021 | | | 8.12 | % | Certificates of deposit (unsecured) | | | 1,075 | | | 08/06/2021 | | | 8.18 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 07/30/2021 | | | 8.36 | % | Certificates of deposit (unsecured) | | | 50 | | | 07/22/2021 | | | 8.38 | % | Certificates of deposit (unsecured) | | | 600 | | | 07/08/2021 | | | 8.38 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 07/08/2021 | | | 8.38 | % | Certificates of deposit (unsecured) | | | 500 | | | 06/15/2021 | | | 8.39 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 06/10/2021 | | | 8.40 | % | Certificates of deposit (unsecured) | | | 600 | | | 05/20/2021 | | | 8.13 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 06/03/2021 | | | 8.14 | % | Certificates of deposit (unsecured) | | | 460 | | | 05/13/2021 | | | 8.14 | % | Certificates of deposit (unsecured) | | | 400 | | | 05/10/2021 | | | 8.12 | % | Certificates of deposit (unsecured) | | | 900 | | | 05/07/2021 | | | 8.38 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 04/21/2021 | | | 8.12 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 02/24/2021 | | | 8.38 | % | Certificates of deposit (unsecured) | | | 1,000 | | | 03/05/2021 | | | 8.12 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 02/12/2021 | | | 8.12 | % | Certificates of deposit (unsecured) | | | 2,000 | | | 01/26/2021 | | | 8.44 | % | Certificates of deposit (unsecured) | | | 1,500 | | | 01/12/2021 | | | 8.34 | % | Certificates of deposit (unsecured) | | | 17 | | | 03/18/2021 | | | 8.12 | % | Certificates of deposit (unsecured) | | | 3 | | | 03/09/2021 | | | 8.12 | % | Certificates of deposit (unsecured) | | | 30 | | | 01/11/2021 | | | 8.89 | % | Certificates of deposit (unsecured) | | | 60 | | | 01/11/2021 | | | 8.89 | % | Certificates of deposit (unsecured) | | | 54 | | | 01/11/2021 | | | 8.90 | % | Certificates of deposit (unsecured) | | | 32 | | | 01/11/2021 | | | 8.89 | % | | | | 34,431 | | | | | | | | Accrued interest | | | 113 | | | | | | | |
| | | 34,544 | | | | | | | | | | | | | | | | | | | Senior Unsecured Notes | | | 19,827 | | | 11/09/2022 | | | 4.125 | % | Senior Unsecured Notes | | | 34,759 | | | 04/17/2025 | | | 5.375 | % | | | | 54,586 | | | | | | | | Accrued interest | | | 490 | | | | | | | | | | | 55,076 | | | | | | | | | | | | | | | | | | | Structured bank bonds | | | 100 | | | 01/06/2021 | | | 9.00 | % | Structured bank bonds | | | 78 | | | 10/27/2021 | | | Guaranteed rate subject to foreign exchange rate | | Structured bank bonds | | | 20 | | | 01/07/2021 | | | 8.00 | % | Structured bank bonds | | | 60 | | | 01/13/2021 | | | 4.42 | % | Structured bank bonds | | | 48 | | | 01/25/2021 | | | 6.00 | % | Structured bank bonds | | | 139 | | | 01/12/2021 | | | 7.00 | % | Structured bank bonds | | | 60 | | | 01/06/2021 | | | 4.98 | % | Structured bank bonds | | | 100 | | | 01/07/2021 | | | 7.00 | % | Structured bank bonds | | | 20 | | | 01/04/2021 | | | 4.00 | % | Structured bank bonds | | | 30 | | | 01/11/2021 | | | 7.15 | % | Structured bank bonds | | | 60 | | | 01/08/2021 | | | 3.29 | % | Structured bank bonds | | | 42 | | | 01/06/2021 | | | 5.67 | % | Structured bank bonds | | | 10 | | | 01/08/2021 | | | 7.00 | % | Structured bank bonds | | | 9 | | | 01/15/2021 | | | 5.38 | % | Structured bank bonds(*) | | | 14 | | | 11/01/2021 | | | Guaranteed rate subject to EURO STOXX 50 | | Structured bank bonds(*) | | | 132 | | | 07/01/2021 | | | Guaranteed rate subject to S&P 500 | | Structured bank bonds(*) | | | 139 | | | 07/29/2021 | | | Guaranteed rate subject to S&P 500 | | Structured bank bonds(*) | | | 222 | | | 03/01/2021 | | | Guaranteed rate subject to S&P 500 | | Structured bank bonds(*) | | | 2 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 6 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 4 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 49 | | | 03/17/2022 | | | TIIE | | Structured bank bonds(*) | | | 30 | | | 05/24/2021 | | | TIIE | | Structured bank bonds(*) | | | 20 | | | 05/12/2021 | | | TIIE | | Structured bank bonds(*) | | | 283 | | | 04/23/2021 | | | TIIE | | Structured bank bonds(*) | | | 58 | | | 03/26/2021 | | | 9.50 | % | Structured bank bonds(*) | | | 167 | | | 03/08/2021 | | | 9.50 | % | Structured bank bonds(*) | | | 162 | | | 01/28/2021 | | | 9.50 | % | Structured bank bonds(*) | | | 5 | | | 03/03/2021 | | | Guaranteed rate subject to SXDP | | Structured bank bonds(*) | | | 6 | | | 03/16/2021 | | | TIIE | | Structured bank bonds(*) | | | 23 | | | 03/03/2021 | | | Guaranteed rate subject to SXDP | | Structured bank bonds(*) | | | 41 | | | 02/23/2021 | | | TIIE | | | | | 2,139 | | | | | | | | Transaction costs and accrued interest (net) | | | — | | | | | | | | | | | 2,139 | | | | | | | | | | | | | | | | | | | Promissory notes | | | 73 | | | 01/04/2021 | | | 4.20 | % | Promissory notes | | | 2,900 | | | 01/15/2021 | | | 4.25 | % | Promissory notes | | | 5,800 | | | 01/15/2021 | | | 4.25 | % | Promissory notes | | | 6,000 | | | 01/15/2021 | | | 4.25 | % | Promissory notes | | | 150 | | | 03/16/2021 | | | 4.15 | % | Promissory notes | | | 150 | | | 01/13/2021 | | | 4.10 | % | Promissory notes | | | 1,000 | | | 09/23/2021 | | | 4.45 | % | Promissory notes | | | 803 | | | 03/17/2021 | | | 4.60 | % | | | | 16,876 | | | | | | | | Accrued interest | | | 48 | | | | | | | | | | | 16,924 | | | | | | | | | | | | | | | | | | | Unsecured bonds | | | 7,150 | | | 03/30/2026 | | | 8.95 | % | Unsecured bonds | | | 3,000 | | | 09/01/2026 | | | 7.19 | % | Unsecured bonds | | | 2,850 | | | 04/04/2022 | | | TIIE + 10 basis points | | Unsecured bonds | | | 4,461 | | | 05/06/2022 | | | TIIE + 15 basis points | | Unsecured bonds | | | 4,000 | | | 06/14/2021 | | | TIIE + 38 basis points | | Unsecured bonds | | | 1,700 | | | 03/09/2021 | | | 8.91 | % | | | | 23,161 | | | | | | | | Accrued interest | | | 273 | | | | | | | | | | | 23,434 | | | | | | | |
| (*)
| Marketable debt securities classified as financial liabilities at fair value through profit or loss.
|
22. Subordinated liabilities
The breakdown of the balance of Subordinated liabilities is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2020 | | | | | | | | | | | | | Outstanding | | | | | | | | | | | | | | | | Issue Amount | | | Annual | Type | | | Currency of Issue | | | 12/31/2019 | | | 12/31/2020 | | | in Foreign Currency | | | Interest Rate (%) | | | | | | | | | | | | | | | | | Subordinated Additional Tier I Capital Notes | | | USD | | | 9,420 | | | 9,948 | | | 500,000,000 | | | 8.50 | Tier II Subordinated Capital Notes | | | USD | | | 24,847 | | | 26,234 | | | 1,300,000,000 | | | 5.95 | | | | Balance at year-end | | | 34,267 | | | 36,182 | | | | | | |
Note 45.a includes a breakdown of the remaining maturity of Subordinated liabilities. Additionally, Note 45.d includes the fair value amounts of these liabilities.
22. Subordinated liabilities The breakdown of the balance of Subordinated liabilities is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2022 | | | | | | | | | | | | | Outstanding | | | | | | | | | | | | | | | | Issue Amount | | | Annual | Type | | | Currency of Issue | | | 12/31/2021 | | | 12/31/2022 | | | in Foreign Currency | | | Interest Rate (%) | | | | | | | | | | | | | | | | | Subordinated Additional Tier I Capital Notes - 2021 | | | USD | | | 14,355 | | | 13,656 | | | 700,000,000 | | | 4.63 | Subordinated Additional Tier I Capital Notes - 2016 | | | USD | | | 10,254 | | | — | | | — | | | — | Tier II Subordinated Capital Notes - 2018 | | | USD | | | 27,034 | | | 25,728 | | | 1,300,000,000 | | | 5.95 | | | | Balance at year-end | | | 51,643 | | | 39,384 | | | | | | |
Note 45.a includes a breakdown of the remaining maturity of Subordinated liabilities. Additionally, Note 45.d includes the fair value amounts of these liabilities. b) Changes The changes in Subordinated liabilities were as follows: | | | | | | | | | | | 2019 | | | 2020 | | Beginning balance (million USD) | | | 1,894 | | | 1,816 | | Issues | | | — | | | — | | Redemptions | | | (77) | | | — | | Transaction costs and accrued interest | | | (1) | | | 1 | | Balance at year-end (million USD) | | | 1,816 | | | 1,817 | | Exchange rate per one USD at December 31 | | | 18.8642 | | | 19.9087 | | Balance at year-end (million pesos) | | | 34,267 | | | 36,182 | |
c) Other disclosures
2013 Tier II Subordinated Capital Notes
On December 27, 2013, the Bank issued debt securities denominated as Tier II Subordinated Capital Notes in the amount of USD 1,300 million equivalent to 1,300,000 securities with a nominal value of USD 1,000 each with a ten-year maturity (January 30, 2024) and with an option to be prepaid in year five. The instruments were issued in accordance with Rule 144A and Regulation S of the US Securities Act of 1933, as amended, with a discount of USD 10 million. Interest will be paid semiannually, on January 30 and July 30, respectively, beginning July 30, 2014. The instruments bear interest at an initial annual interest rate of 5.95% per year during the first five years.
As mentioned in Note 3, 94.07% of existing holders tendered the cash offer announced by the Bank for the Tier II Subordinated Capital Notes.
The main features of this issue were as follows:
| a) | If notes are not redeemed in year five, the interest rate for the second five-year period shall be based on the interest rate on US five-year Treasury Notes in effect at that moment plus the spread defined in the offering memorandum. |
| b) | Loss absorption mechanism through a write-down of the issue being the trigger event a computation of the Bank’s Basic Capital index of 4.5%. |
| c) | Partial write-down until the Bank achieves a Basic Capital index of 7.0%. |
| d) | When the Bank computes a Basic Capital index of 8.0%: |
| -
| Possible deferral of principal, interest or other remedies determined by the CNBV.
|
| -
| Possible write-down due to breach of remediation.
|
| -
| Possible early prepayment in an event of non-deductibility of interest or by the increase in the applicable withholding tax led by the consideration of the notes issued as Tier II Complementary Capital.
|
2016 Subordinated Additional Tier I Capital Notes
On December 29, 2016, the Bank
| | | | | | | | | | | 2021 | | | 2022 | | Beginning balance (million USD) | | | 1,817 | | | 2,518 | | Issues | | | 700 | | | — | | Redemptions | | | — | | | (500) | | Transaction costs and accrued interest | | | 1 | | | 1 | | Balance at year-end (million USD) | | | 2,518 | | | 2,019 | | Exchange rate per one USD at December 31 | | | 20.5075 | | | 19.5089 | | Balance at year-end (million pesos) | | | 51,643 | | | 39,384 | |
c) Other disclosures 2016 Subordinated Additional Tier I Capital Notes On December 29, 2016, Banco Santander México issued Subordinated Additional Tier I Capital Notes for an amount of USD 500 million. Subordinated Additional Tier I Capital Notes are convertible into common Series F shares and are callable (either fully or partially) at par in cash at the first call date (January 20, 2022) and subsequently every interest payment date. Interests are non-cumulative and fully discretionary. Some trigger events originate the cancellation of interest payment. Additional characteristics of the Subordinated Additional Tier I Capital Notes are as follows: | ● | Automatically convertible into common Series F shares and are callable (either fullywhen the Common Equity Tier I (CET I) or partially)Basic Capital is equal to or below 5.125% (among other trigger events) at par in cash atConversion price (defined below). |
| ● | Conversion price: The conversion price shall be, if the first call date (January 20, 2022) and subsequently every interest payment date. Interests are non-cumulative and fully discretionary. Some trigger events originatecommon shares are: |
| i. | traded on the cancellation of interest payment.Additional characteristicsMexican Stock Exchange, the higher of:
|
| a. | the weighted average volume of the Subordinated Additional Tier I Capital Notes are as follows: | ● | Automatically convertible into common shares when the Common Equity Tier I (CET I) or Basic Capital is equal to or below 5.125% (among other trigger events) at Conversion price (defined below).ordinary shares closing price on the Mexican Stock Exchange for the thirty consecutive business days immediately preceding the conversion date, |
| ● | Conversion price: The conversion price shall be, if the common shares are: |
| i. | traded on the Mexican Stock Exchange, the higher of: |
| a. | the weighted average volume of the ordinary shares closing price on the Mexican Stock Exchange for the thirty consecutive business days immediately preceding the conversion date, | | with each closing price for the thirty consecutive business days being converted from pesos into USD at the then prevailing exchange rate; or; |
| b. | the floor price of 20.30 pesos converted into USD at the then-prevailing exchange rate. |
| ii. | not traded on the Mexican Stock Exchange, the floor price of 20.30 pesos converted into USD at the then-prevailing exchange rate. |
| ● | Subordinated Additional Tier I Capital Notes will accrue interest on an annual interest rate of 8.5% (subject to not being called in advance at the first call date or if the automatic conversion occurs), which will reset every five years considering the current five-year US Government Treasury Bills interest rate plus the original credit spread. Interest payments will be recognized as a reduction of Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. |
| ● | Fully callable in advance if the Subordinated Additional Tier I Capital Notes: i) fail to be considered as Fundamental Basic Capital, ii) interests are considered non-deductible for tax purposes, or iii) the applicable withholding tax increases. |
| ● | Any call in advance must be authorized by the Central Bank. |
These Subordinated Additional Tier I Capital Notes are accounted for as a compound instrument with both liability and equity components (that arises from the contingent settlement provision and from the right of the holders to receive discretional interest payments, respectively). The payment of discretionary interest is recorded in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
|
| ● | Fully callable in advance if the Subordinated Additional Tier I Capital Notes: i) fail to be considered as Fundamental Basic Capital, ii) interest is considered non-deductible for tax purposes, or iii) the applicable withholding tax increases. |
| ● | Any call in advance must be authorized by the Central Bank. |
These Subordinated Additional Tier I Capital Notes are accounted for as a compound instrument with both liability and equity components (that arises from the contingent settlement provision and from the right of the holders to receive discretional interest payments, respectively). The payment of discretionary interest is recorded in Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
The liability component is recognized at the par value of the Subordinated Additional Tier I Capital Notes and is then deducted from the fair value of the compound financial instrument as a whole to arrive at the value of the equity component. A zero balance to the equity component is assigned, since there is an obligation to pay the full redemption amount and cannot avoid settlement in cash or another financial asset for the full redemption amount. In addition, an embedded derivative arises from the call option features on the Subordinated Additional Tier I Capital Notes within five years subsequent to the issuance date and on every interest payment date thereafter. This call option is deemed to be closely related to the Subordinated Additional Tier I Capital Notes and is not accounted for separately. During 2022, the position of 2016 Subordinated Additional Tier I Capital Notes was settled. 2018 Tier II Subordinated Notes On October 1, 2018, Banco Santander México issued debt securities denominated as Tier II Subordinated Notes in the amount of USD 1,300 million equivalent to 1,300,000 securities with a nominal value of USD 1,000 each with a ten-year maturity (October 30, 2028) and with an option to be prepaid in year five. The instruments were issued in accordance with Rule 144A and Regulation S of the US Securities Act of 1933. Interest will be paid semiannually, on April 1 and October 1, respectively, beginning April 30, 2020. The instruments bear interest at an initial annual interest rate of 5.95% per year during the first five years. The main features of this issue are as follows: | a) | If notes are not redeemed in year five, the interest rate for the second five-year period shall be based on the interest rate on US five-year Treasury Notes in effect at that moment plus the spread defined in the offering memorandum. |
| b) | Loss absorption mechanism through a write-down of the issue being the trigger event a computation of Banco Santander México’s Basic Capital index of 4.5%. |
| c) | Partial write-down until Banco Santander México achieves a Basic Capital index of 7.0%. |
| d) | When Banco Santander México computes a Basic Capital index of 8.0%: |
| - | Possible deferral of principal, interest or other remedies determined by the CNBV. |
| - | Possible write-down due to breach of remediation. |
| - | Possible early prepayment in an event of non-deductibility of interest or by the increase in the applicable withholding tax led by the consideration of the notes issued as Tier II Complementary Capital. |
With the proceeds obtained from the issue of these Tier II Subordinated Notes, Banco Santander México redeemed in advance USD 1,223 million of the Tier II Subordinated Capital Notes issued on December 27, 2013. 2021 Subordinated Additional Tier I Capital Notes On September 15, 2021, Banco Santander México issued perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes for USD 700 million with no fixed maturity or fixed redemption date, at an annual variable interest rate, which will be recalculated every 5 years based on the yield of the Treasury Notes of the United States of North America (US Treasury Notes) with a term of 5 years that is in force at that time plus the spread defined in the placement supplement. Additional characteristics of the Subordinated Additional Tier I Capital Notes are as follows: | ● | The initial annual interest rate at the time of issuance was 4.625%. |
| ● | Conversion price: The conversion price shall be, if the common shares are: |
i.traded on the Mexican Stock Exchange, the higher of: a.the weighted average volume of the ordinary shares closing price on the Mexican Stock Exchange for the thirty consecutive business days immediately preceding the conversion date, with each closing price for the thirty consecutive business days being converted from pesos into USD at the then prevailing exchange rate; or; b.the floor price of 13.33 pesos converted into USD at the then-prevailing exchange rate. ii.not traded on the Mexican Stock Exchange, the floor price of 13.33 pesos converted into USD at the then-prevailing exchange rate. | ● | Banco Santander México may prepay the Additional Tier I Capital Notes after five years, prior compliance with the following: |
| - | Authorization is obtained from Banco de México to amortize the Subordinated Additional Tier I Capital Notes early; |
| - | If Banco Santander México maintains its total capitalization ratio equal to or greater than that required by the CNBV plus the corresponding capital supplements; or if |
| - | Replace the instrument with other financial instruments. |
d) Reconciliation of liabilities arising from financing activities The table below details changes in the Bank’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the consolidated statement of cash flows as cash flows from financing activities. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-cash changes | | | | | | | January 1, 2021 | | | Cash flows | | | Accrued | | | Transaction | | | Foreign exchange | | | December 31, 2021 | Type | | | | | | | | | interest | | | costs | | | movements | | | | | | | | | | | | | | | | | | | | | | | Subordinated Additional Tier I Capital Notes | | | — | | | 13,930 | | | — | | | — | | | 425 | | | 14,355 | Subordinated Additional Tier I Capital Notes | | | 9,948 | | | — | | | — | | | 6 | | | 300 | | | 10,254 | Tier II Subordinated Capital Notes | | | 26,234 | | | (1,586) | | | 1,576 | | | 10 | | | 800 | | | 27,034 | Balances at | | | 36,182 | | | 12,344 | | | 1,576 | | | 16 | | | 1,525 | | | 51,643 |
As of December 31, 2021, the Bank paid 1,073 million pesos related to interests on the Subordinated Additional Tier I Capital Notes, which were recognized against Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-cash changes | | | | | | | January 1, 2022 | | | Cash flows | | | Accrued | | | Transaction | | | Foreign exchange | | | December 31, 2022 | Type | | | | | | | | | interest | | | costs | | | movements | | | | | | | | | | | | | | | | | | | | | | | Subordinated Additional Tier I Capital Notes | | | 14,355 | | | — | | | — | | | — | | | (699) | | | 13,656 | Subordinated Additional Tier I Capital Notes | | | 10,254 | | | (10,251) | | | — | | | — | | | (3) | | | — | Tier II Subordinated Capital Notes | | | 27,034 | | | (1,548) | | | 1,550 | | | 11 | | | (1,319) | | | 25,728 | Balances at | | | 51,643 | | | (11,799) | | | 1,550 | | | 11 | | | (2,021) | | | 39,384 |
As of December 31, 2022, the Bank paid 919 million pesos related to interests on the Subordinated Additional Tier I Capital Notes, which were recognized against Accumulated reserves within Shareholders’ equity in the consolidated balance sheet. 23. Other financial liabilities The breakdown of Other financial liabilities is then deducted from the fair value of the compound financial instrument as a whole to arrive at the value of the equity component. A zero balance to the equity component is assigned, since there is an obligation to pay the full redemption amount and cannot avoid settlement in cash or another financial asset for the full redemption amount. In addition, an embedded derivative arises from the call option features on the Subordinated Additional Tier I Capital Notes within five years subsequent to the issuance date and on every interest payment date thereafter. This call option is deemed to be closely related to the Subordinated Additional Tier I Capital Notes and is not accounted for separately.
2018 Tier II Subordinated Notes
On October 1, 2018, the Bank issued debt securities denominated as Tier II Subordinated Notes in the amount of USD 1,300 million equivalent to 1,300,000 securities with a nominal value of USD 1,000 each with a ten-year maturity (October 30, 2028) and with an option to be prepaid in year five. The instruments were issued in accordance with Rule 144A and Regulation S of the US Securities Act of 1933. Interest will be paid semiannually, on April 1 and October 1, respectively, beginning April 30, 2019. The instruments bear interest at an initial annual interest rate of 5.95% per year during the first five years.
The main features of this issue are as follows:
| e) | If notes are not redeemed in year five, the interest rate for the second five-year period shall be based on the interest rate on US five-year Treasury Notes in effect at that moment plus the spread defined in the offering memorandum. |
| f) | Loss absorption mechanism through a write-down of the issue being the trigger event a computation of the Bank’s Basic Capital index of 4.5%. |
| g) | Partial write-down until the Bank achieves a Basic Capital index of 7.0%. |
| h) | When the Bank computes a Basic Capital index of 8.0%: |
| | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Trade payables | | | 1,388 | | | 966 | Collection accounts: | | | | | | | Taxes payable | | | 1,210 | | | 1,367 | Financial transactions pending settlement | | | 10,504 | | | 10,898 | Other financial liabilities | | | 4,136 | | | 6,242 | | | | 17,238 | | | 19,473 |
Note 45.a includes a breakdown of the remaining maturity periods of Other financial liabilities. In addition, Note 45.d contains the fair value amounts of these liabilities. | -
| Possible deferral of principal, interest or other remedies determined by the CNBV.
|
| -
| Possible write-down due to breach of remediation.
|
| -
| Possible early prepayment in an event of non-deductibility of interest or by the increase in the applicable withholding tax led by the consideration of the notes issued as Tier II Complementary Capital.
|
With the proceeds obtained from the issue of these Tier II Subordinated Notes, the Bank redeemed in advance USD 1,223 million of the Tier II Subordinated Capital Notes issued on December 27, 2013.
d) Reconciliation of liabilities arising from financing activities
The table below details changes in the Bank’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or
future cash flows will be, classified in the consolidated statement of cash flows as cash flows from financing activities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-cash changes | | | | | | | January 1, 2019 | | | Cash flows | | | Accrued | | | Transaction | | | Foreign exchange | | | December 31, 2019 | Type | | | | | | | | | interest | | | costs | | | movements | | | | | | | | | | | | | | | | | | | | | | | Tier II Subordinated Capital Notes | | | 1,546 | | | (1,521) | | | 6 | | | 7 | | | (38) | | | — | Subordinated Additional Tier I Capital Notes | | | 9,809 | | | — | | | — | | | 4 | | | (393) | | | 9,420 | Tier II Subordinated Capital Notes | | | 25,873 | | | (1,513) | | | 1,495 | | | 7 | | | (1,015) | | | 24,847 | Balances at | | | 37,228 | | | (3,034) | | | 1,501 | | | 18 | | | (1,446) | | | 34,267 |
As of December 31, 2019, the Bank paid 808 million pesos related to interests on the Subordinated Additional Tier I Capital Notes, which were recognized against Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-cash changes | | | | | | | January 1, 2020 | | | Cash flows | | | Accrued | | | Transaction | | | Foreign exchange | | | December 31, 2020 | Type | | | | | | | | | interest | | | costs | | | movements | | | | | | | | | | | | | | | | | | | | | | | Subordinated Additional Tier I Capital Notes | | | 9,420 | | | — | | | — | | | 6 | | | 522 | | | 9,948 | Tier II Subordinated Capital Notes | | | 24,847 | | | (1,765) | | | 1,669 | | | 8 | ��� | | 1,475 | | | 26,234 | Balances at | | | 34,267 | | | (1,765) | | | 1,669 | | | 14 | | | 1,997 | | | 36,182 |
As of December 31, 2020, the Bank paid 964 million pesos related to interests on the Subordinated Additional Tier I Capital Notes, which were recognized against Accumulated reserves within Shareholders’ equity in the consolidated balance sheet.
23. Other financial liabilities
The breakdown of Other financial liabilities is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Trade payables | | | 1,451 | | | 2,279 | Collection accounts: | | | | | | | Tax payables | | | 1,160 | | | 1,465 | Financial transactions pending settlement | | | 9,267 | | | 8,281 | Other financial liabilities | | | 3,886 | | | 3,290 | | | | 15,764 | | | 15,315 |
Note 45.a includes a breakdown of the remaining maturity periods of Other financial liabilities. In addition, Note 45.d contains the fair value amounts of these liabilities.
The breakdown of Financial transactions pending settlement is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Mexican government securities | | | 8,059 | | | 7,362 | BPATS | | | 1,003 | | | 912 | Equity instruments | | | 205 | | | 7 | | | | 9,267 | | | 8,281 |
The breakdown of Other financial liabilities is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Retentions related to loans (*) | | | 1,524 | | | 1,611 | Other payable account | | | 2,362 | | | 1,679 | | | | 3,886 | | | 3,290 |
The breakdown of Financial transactions pending settlement is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Mexican government securities | | | 6,217 | | | 10,280 | CETES | | | 2,426 | | | 491 | UDIBONDS | | | 1,861 | | | 102 | Equity instruments | | | — | | | 25 | | | | 10,504 | | | 10,898 |
The breakdown of Other financial liabilities is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Retentions related to loans (*) | | | 2,479 | | | 2,385 | Other payable account | | | 1,657 | | | 3,857 | | | | 4,136 | | | 6,242 |
| (*) | These amounts correspond to temporary retention accounts for customers that have their payroll deposits with the Bank and to whom the Bank has granted a loan. |
24. Provisions
a) Breakdown
The breakdown of Provisions is as follows:
| | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Provisions for pensions and similar obligations | | | 6,406 | | | 7,433 | Provisions for tax and legal matters | | | 1,558 | | | 1,898 | Provisions for off-balance sheet risk | | | 1,075 | | | 1,232 | Other provisions | | | 65 | | | 41 | | | | 9,104 | | | 10,604 |
b) Changes
The changes in Provisions were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | Provisions | | | | | | Provisions | | | | | | | | | Provisions | | | Provisions | | | Provisions | | | | | | | | | Provisions | | | Provisions | | | Provisions | | | | | | | | | | | for Pensions | | | Provisions | | | for Off- | | | | | | | | | for Pensions | | | for Tax and | | | for Off- | | | | | | | | | for Pensions | | | for Tax and | | | for Off- | | | | | | | | | | | and Similar | | | for Tax and | | | Balance- | | | Other | | | | | | and Similar | | | Legal | | | Balance- | | | Other | | | | | | and Similar | | | Legal | | | Balance- | | | Other | | | | | | | | Obligations | | | Legal Matters | | | Sheet Risk | | | Provisions | | | Total | | | Obligations | | | Matters | | | Sheet Risk | | | Provisions | | | Total | | | Obligations | | | Matters | | | Sheet Risk | | | Provisions | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at the beginning of year (as originally presented) | | | 3,860 | | | 1,072 | | | 1,032 | | | 766 | | | 6,730 | | | 4,370 | | | 1,516 | | | 852 | | | 62 | | | 6,800 | | | 6,406 | | | 1,558 | | | 1,075 | | | 65 | | | 9,104 | | Adjustments on initial adoption of IFRS 9 | | | — | | | — | | | (32) | | | — | | | (32) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Beginning balance as of January 1 (restated) | | | 3,860 | | | 1,072 | | | 1,000 | | | 766 | | | 6,698 | | | 4,370 | | | 1,516 | | | 852 | | | 62 | | | 6,800 | | | 6,406 | | | 1,558 | | | 1,075 | | | 65 | | | 9,104 | | Additions charged (credited) to net income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense and similar charges | | | 359 | | | — | | | — | | | — | | | 359 | | | 415 | | | — | | | — | | | — | | | 415 | | | 442 | | | — | | | — | | | — | | | 442 | | Personnel expenses – Defined Benefit Plan | | | 157 | | | — | | | — | | | — | | | 157 | | | 147 | | | — | | | — | | | — | | | 147 | | | 273 | | | — | | | — | | | — | | | 273 | | Personnel expenses – Defined Contribution Plan (Note 42) | | | 373 | | | — | | | — | | | — | | | 373 | | | 410 | | | — | | | — | | | — | | | 410 | | | 488 | | | — | | | — | | | — | | | 488 | | Other | | | 129 | | | — | | | — | | | — | | | 129 | | | 257 | | | — | | | — | | | — | | | 257 | | | 256 | | | — | | | — | | | — | | | 256 | | Actuarial (gains)/losses recognized in the year in other comprehensive income | | | (260) | | | — | | | — | | | — | | | (260) | | | 1,673 | | | — | | | — | | | — | | | 1,673 | | | 995 | | | — | | | — | | | — | | | 995 | | Period provisions | | | — | | | 576 | | | (148) | | | 5 | | | 433 | | | — | | | 353 | | | 223 | | | 5 | | | 581 | | | — | | | 586 | | | 157 | | | (20) | | | 723 | | Contributions from the employer | | | 246 | | | — | | | — | | | — | | | 246 | | | 118 | | | — | | | — | | | — | | | 118 | | | — | | | — | | | — | | | — | | | — | | Payments to pensioners and pre-retirees with a charge to internal provisions | | | (234) | | | — | | | — | | | — | | | (234) | | | (348) | | | — | | | — | | | — | | | (348) | | | (881) | | | — | | | — | | | — | | | (881) | | Other payments (*) | | | — | | | (284) | | | — | | | | | | (284) | | | — | | | — | | | — | | | | | | — | | | — | | | (246) | | | — | | | — | | | (246) | | Payments to Defined Contribution Plan | | | (347) | | | — | | | — | | | — | | | (347) | | | (636) | | | (311) | | | — | | | — | | | (947) | | | (475) | | | — | | | — | | | — | | | (475) | | Recognition of pension obligations from acquisition of Santander Tecnología México | | | 95 | | | — | | | — | | | — | | | 95 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Transfers and other changes | | | (8) | | | 152 | | | — | | | (709) | | | (565) | | | — | | | — | | | — | | | (2) | | | (2) | | | (71) | | | — | | | — | | | (4) | | | (75) | | Balances at the end of year | | | 4,370 | | | 1,516 | | | 852 | | | 62 | | | 6,800 | | | 6,406 | | | 1,558 | | | 1,075 | | | 65 | | | 9,104 | | | 7,433 | | | 1,898 | | | 1,232 | | | 41 | | | 10,604 | |
(*)
| Included in these amounts are payments made by the Bank to the Mexican Tax Administration Service (Servicio de Administración Tributaria) of 1 million pesos in 2018, 3 million pesos in 2019 and 1 million pesos in 2020 because the Bank was not withholding income tax in transactions with financial derivative instruments with certain counterparties.
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c) Provisions for pensions and similar obligations
Defined contribution plan
The Bank sponsors a defined contribution retirement benefit plan for all qualifying employees whereby the Bank agrees to contribute pre-established cash amounts to a given investment fund, in which the employee’s benefits consist of the sum of such contributions, plus or minus the gains or losses from the management of such funds of those employees who form part of this defined contribution retirement benefit plan. The qualifying employees are those who began working for the Bank after 2006. The retirement age is 65 years.
The assets of the plan are held separately from those of the Bank in funds under the control of trustees.
The Bank recognized as Administrative expenses – Personnel expenses in the consolidated income statement the amounts of 373 million pesos, 226 million pesos and 238 million pesos in 2018, 2019 and 2020, respectively (see Note 42), related to contributions payable to the defined contribution retirement benefit plan.
Defined benefit plan
According to Mexican Labor Law, the Bank is liable for severance payments for employees who are terminated by the Bank and seniority premiums, which are statutory retirement benefits. In addition,to whom the Bank offershas granted a defined benefit pension plan and other post-retirement benefits agreed under a collective bargaining agreement. The defined benefit plans are administered in a pension fund that is legally separated from the Bank. The trustee of the pension fund is required by law to act in the best interests of the plan participants and is responsible for setting certain policies (e.g. investment, contribution and indexation policies) of the fund.loan.
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24. Provisions a) Breakdown The breakdown of Provisions is as follows: | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Provisions for pensions and similar obligations | | | 7,499 | | | 8,158 | Provisions for tax and legal matters | | | 2,141 | | | 3,009 | Provisions for off-balance sheet risk | | | 1,108 | | | 1,539 | Other provisions | | | 41 | | | 225 | | | | 10,789 | | | 12,931 |
b) Changes The changes in Provisions were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | Provisions | | | | | | Provisions | | | | | | | | | Provisions | | | Provisions | | | Provisions | | | | | | | | | Provisions | | | Provisions | | | Provisions | | | | | | | | | | | for Pensions | | | Provisions | | | for Off- | | | | | | | | | for Pensions | | | for Tax and | | | for Off- | | | | | | | | | for Pensions | | | for Tax and | | | for Off- | | | | | | | | | | | and Similar | | | for Tax and | | | Balance- | | | Other | | | | | | and Similar | | | Legal | | | Balance- | | | Other | | | | | | and Similar | | | Legal | | | Balance- | | | Other | | | | | | | | Obligations | | | Legal Matters | | | Sheet Risk | | | Provisions | | | Total | | | Obligations | | | Matters | | | Sheet Risk | | | Provisions | | | Total | | | Obligations | | | Matters | | | Sheet Risk | | | Provisions | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at the beginning of year | | | 6,406 | | | 1,558 | | | 1,075 | | | 65 | | | 9,104 | | | 7,433 | | | 1,898 | | | 1,232 | | | 41 | | | 10,604 | | | 7,499 | | | 2,141 | | | 1,108 | | | 41 | | | 10,789 | | Additions charged (credited) to net income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest expense and similar charges | | | 442 | | | — | | | — | | | — | | | 442 | | | 475 | | | — | | | — | | | — | | | 475 | | | 569 | | | — | | | — | | | — | | | 569 | | Personnel expenses – Defined Benefit Plan | | | 273 | | | — | | | — | | | — | | | 273 | | | 260 | | | — | | | — | | | — | | | 260 | | | 222 | | | — | | | — | | | — | | | 222 | | Personnel expenses – Defined Contribution Plan (Note 42) | | | 488 | | | — | | | — | | | — | | | 488 | | | 483 | | | — | | | — | | | — | | | 483 | | | 555 | | | — | | | — | | | — | | | 555 | | Other | | | 256 | | | — | | | — | | | — | | | 256 | | | 252 | | | — | | | — | | | — | | | 252 | | | 251 | | | — | | | — | | | — | | | 251 | | Actuarial (gains)/losses recognized in the year in other comprehensive income | | | 995 | | | — | | | — | | | — | | | 995 | | | 79 | | | — | | | — | | | — | | | 79 | | | 483 | | | — | | | — | | | — | | | 483 | | Period provisions | | | — | | | 586 | | | 157 | | | (20) | | | 723 | | | — | | | 295 | | | (124) | | | — | | | 171 | | | — | | | 1,069 | | | 431 | | | 184 | | | 1,684 | | Contributions from the employer | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Payments to pensioners and pre-retirees with a charge to internal provisions | | | (881) | | | — | | | — | | | — | | | (881) | | | (921) | | | — | | | — | | | — | | | (921) | | | (901) | | | — | | | — | | | — | | | (901) | | Other payments | | | — | | | (246) | | | — | | | — | | | (246) | | | — | | | (52) | | | — | | | — | | | (52) | | | — | | | (201) | | | — | | | — | | | (201) | | Payments to Defined Contribution Plan | | | (475) | | | — | | | — | | | — | | | (475) | | | (468) | | | — | | | — | | | — | | | (468) | | | (206) | | | — | | | — | | | — | | | (206) | | Recognition of pension obligations from acquisition of Santander Tecnología México | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Transfers and other changes | | | (71) | | | — | | | — | | | (4) | | | (75) | | | (94) | | | — | | | — | | | — | | | (94) | | | (314) | | | — | | | — | | | — | | | (314) | | Balances at the end of year | | | 7,433 | | | 1,898 | | | 1,232 | | | 41 | | | 10,604 | | | 7,499 | | | 2,141 | | | 1,108 | | | 41 | | | 10,789 | | | 8,158 | | | 3,009 | | | 1,539 | | | 225 | | | 12,931 | |
c) Provisions for pensions and similar obligations Defined contribution plan The Bank sponsors a defined contribution retirement benefit plan for all qualifying employees whereby the Bank agrees to contribute pre-established cash amounts to a given investment fund, in which the employee’s benefits consist of the sum of such contributions, plus or minus the gains or losses from the management of such funds of those employees who form part of this defined contribution retirement benefit plan. The qualifying employees are those who began working for the Bank after 2006. The retirement age is 65 years. The assets of the plan are held separately from those of the Bank in funds under the control of trustees. The Bank recognized as Administrative expenses – Personnel expenses in the consolidated income statement the amounts of 488 million pesos, 483 million pesos and 555 million pesos in 2020, 2021 and 2022, respectively (see Note 42), related to contributions payable to the defined contribution retirement benefit plan. Defined benefit plan According to Mexican Labor Law, the Bank is liable for severance payments for employees who are terminated by the Bank and seniority premiums, which are statutory retirement benefits. In addition, the Bank offers a defined benefit pension plan and other post-retirement benefits agreed under a collective bargaining agreement. The defined benefit plans are administered in a pension fund that is legally separated from the Bank. The trustee of the pension fund is required by law to act in the best interests of the plan participants and is responsible for setting certain policies (e.g. investment, contribution and indexation policies) of the fund. During the year, the Bank estimates and recognizes the net periodic cost to create a provision that covers the net projected obligation from pensions, medical expenses, seniority premiums and severance payments. These estimates are related to the obligations derived from Mexican Labor Law, as well as the obligations derived from the collective bargaining agreement. Therefore, the liability is accrued at the present value of future cash flows required to settle the obligation from benefits projected to the estimated retirement date of the Bank’s employees calculated based on the projected unit credit method. The plans typically expose the Bank to actuarial risks such as investment risk, interest rate risk, longevity risk and salary risk. During the year, the Bank estimates and recognizes the net periodic cost to create a provision that covers the net projected obligation from pensions, medical expenses, seniority premiums and severance payments. These estimates are related to the obligations derived from Mexican Labor Law, as well as the obligations derived from the collective bargaining agreement. Therefore, the liability is accrued at the present value of future cash flows required to settle the obligation from benefits projected to the estimated retirement date of the Bank’s employees calculated based on the projected unit credit method.
| The plans typically expose the Bank to actuarial risks such as investment risk, interest rate risk, longevity risk and salary risk.
| | Investment risk | The present value of the defined benefit plan liability is calculated using a discount rate determined by reference to Mexican government bond yields; if the return on plan asset is below this rate, it will create a plan deficit. Currently the plan has a relatively balanced investment in debt instruments and equity securities. Due to the long-term nature of the plan liabilities, the board of the pension fund considers it appropriate that a reasonable portion of the plan assets should be invested in equity securities to leverage the return generated by the fund. | Interest risk | A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase in the return on the plan’s debt investments. | Longevity risk | The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability. | Salary risk | The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability. | Salary risk
| The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.
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Provisions for defined benefit post-employment plan, which benefits include a pension and medical expenses plan, severance payments and seniority premiums, amounted to 6,328 million pesos and 7,342 million pesos as of December 31, 2019 and 2020, respectively.
The investment fund of the defined benefit post-employment plan was 2,068 million pesos and 2,186 million pesos as of December 31, 2019 and 2020, respectively. Investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. Plan assets in 2019 and 2020 consist of debt and equity instruments. The Bank believes that equities offer the best returns over the long-term with an acceptable level of risk.
Prior to January 1, 2006, the Bank offered a defined benefit medical expenses plan to all eligible employees (and their families) that upon retirement provided for the payment of 100% of medical expenses due to illness or accidents. Under this medical expenses plan, the Bank accrues the estimated medical expenses based upon actuarial calculations during the period of employment up to the date of retirement.
Beginning on January 1, 2006, the Bank introduced a new defined contribution medical expenses plan referred to as the “Retirement Medical Coverage Plan”. All individuals employed after January 1, 2006 were automatically enrolled in this plan. Employees with more than six months of service as of January 1, 2006 were given the option of remaining under the defined benefit medical expenses plan or to be transferred to the “Retirement Medical Coverage Plan”. Under the “Retirement Medical Coverage Plan”, the Bank pays pre-established cash amounts to a given investment fund. An employee’s benefit consists of the sum of such contributions, plus or minus the gains or losses from the management of such funds.
As of December 31, 2019 and 2020, approximately 0.8% and 1.7% of the Bank’s employees, respectively, were enrolled still in the defined benefit pension plan while the rest of the employees were enrolled in the defined contribution pension plan.
As of December 31, 2019 and 2020, approximately 83%
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Provisions for defined benefit post-employment plan, which benefits include a pension and medical expenses plan, severance payments and seniority premiums, amounted to 7,393 million pesos and 8,088 million pesos As of December 31, 2021 and 2022, respectively. The investment fund of the defined benefit post-employment plan was 1,943 million pesos and 1,680 million pesos as of December 31, 2021 and 2022, respectively. Investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. Plan assets in 2021 and 2022 consist of debt and equity instruments. The Bank believes that equities offer the best returns over the long-term with an acceptable level of risk. Prior to January 1, 2006, the Bank offered a defined benefit medical expenses plan to all eligible employees (and their families) that upon retirement provided for the payment of 100% of medical expenses due to illness or accidents. Under this medical expenses plan, the Bank accrues the estimated medical expenses based upon actuarial calculations during the period of employment up to the date of retirement. Beginning on January 1, 2006, the Bank introduced a new defined contribution medical expenses plan referred to as the “Retirement Medical Coverage Plan”. All individuals employed after January 1, 2006 were automatically enrolled in this plan. Employees with more than six months of service as of January 1, 2006 were given the option of remaining under the defined benefit medical expenses plan or to be transferred to the “Retirement Medical Coverage Plan”. Under the “Retirement Medical Coverage Plan”, the Bank pays pre-established cash amounts to a given investment fund. An employee’s benefit consists of the sum of such contributions, plus or minus the gains or losses from the management of such funds. As of December 31, 2021 and 2022, approximately 0.5% of the Bank’s employees were enrolled still in the defined benefit pension plan while the rest of the employees were enrolled in the defined contribution pension plan. As of December 31, 2021 and 2022, approximately 73% and 81% of the Bank’s employees enrolled in the defined contribution pension plan have been included in the “Retirement Medical Coverage Plan”. Employees that start working for the Bank on August 16, 2014 and later, do not have the option to be enrolled in the “Retirement Medical Coverage Plan” because they are registered in the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social, or IMSS by its Spanish acronym) as their medical coverage. In addition, they have a medical insurance provided by the Bank that covers its major medical expenses. The breakdown of Provisions for pensions and similar obligations is as follows: | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Provisions for post-employment plans | | | | | | | Of which: Defined benefit pension plan | | | 6,328 | | | 7,342 | Provisions for defined contribution pension plan | | | 78 | | | 91 | | | | 6,406 | | | 7,433 |
| | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Provisions for post-employment plans | | | | | | | Of which: Defined benefit pension plan | | | 7,393 | | | 8,088 | Provisions for defined contribution pension plan | | | 106 | | | 70 | | | | 7,499 | | | 8,158 |
The amount of the defined benefit obligations was determined using the following actuarial techniques: | 1. | Valuation method: projected unit credit method, which sees each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately. |
| 2. | Actuarial assumptions used: The most significant actuarial assumptions used in the calculations were as follows: |
| | | | | | | | | | | Defined Benefit Pension Plan | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | Annual discount rate | | | 7.3 | % | | 6.8 | % | Mortality tables | | | EMSSA 1997 and 2009 | | | EMSSA 2009 (Gen) | | Expected return on plan assets | | | 7.3 | % | | 6.8 | % | Cumulative annual INPC growth | | | 3.5 | % | | 3.5 | % | Annual salary increase rate | | | 4.5 | % | | 4.5 | % | Annual minimum salary increase rate | | | 4.0 | % | | 3.5 | % | Medical cost trend rates | | | 5.0 | % | | 5.0 | % |
| | | | | | | | | | | Defined Benefit Pension Plan | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | Annual discount rate | | | 8.0 | % | | 9.0 | % | Mortality tables | | | EMSSA 2009 (Gen) | | | EMSSA 2009 (Gen) | | Expected return on plan assets | | | 8.0 | % | | 9.0 | % | Cumulative annual INPC growth | | | 3.5 | % | | 3.5 | % | Annual salary increase rate | | | 4.5 | % | | 4.5 | % | Annual minimum salary increase rate | | | 3.5 | % | | 3.5 | % | Medical cost trend rates | | | 6.0 | % | | 6.0 | % |
The determination of the discount rate considers the term and performance of Mexican government bonds. | 3. | The estimated retirement age of each employee is the first year in which the employee is entitled to retire or the agreed-upon age, as appropriate. The retirement age is 65 years. |
The funding status of the defined benefit obligations is as follows: | | | | | | | | | | | Defined Benefit | | | | | Pension Plan | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | Present value of the obligations: | | | | | | | | Pension plan | | | 2,567 | | | 2,758 | | Post-employment benefits | | | 5,127 | | | 6,055 | | Long-term benefits | | | 702 | | | 715 | | | | | 8,396 | | | 9,528 | | Less: | | | | | | | | Fair value of plan assets | | | (2,068) | | | (2,186) | | | | | | | | | | Provisions – Provisions for pensions | | | 6,328 | | | 7,342 | | Of which: | | | | | | | | Internal provisions for pensions | | | 6,328 | | | 7,342 | |
| | | | | | | | | | | Defined Benefit | | | | | Pension Plan | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | Present value of the obligations: | | | | | | | | Pension plan | | | 2,447 | | | 2,326 | | Post-employment benefits | | | 6,153 | | | 6,646 | | Long-term benefits | | | 736 | | | 796 | | | | | 9,336 | | | 9,768 | | Less: | | | | | | | | Fair value of plan assets | | | (1,943) | | | (1,680) | | | | | | | | | | Provisions – Provisions for pensions | | | 7,393 | | | 8,088 | | Of which: | | | | | | | | Internal provisions for pensions | | | 7,393 | | | 8,088 | |
The amounts recognized in the consolidated income statement in relation to the aforementioned defined benefit obligations are as follows: | | | | | | | | | | | | | | Defined Benefit | | | | | Pension Plan | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Current service cost | | | 157 | | | 147 | | | 273 | | Interest cost (net) | | | 359 | | | 415 | | | 442 | | Other | | | 129 | | | 257 | | | 256 | | | | | 645 | | | 819 | | | 971 | |
| | | | | | | | | | | | | | Defined Benefit | | | | | Pension Plan | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Current service cost | | | 273 | | | 260 | | | 222 | | Interest cost (net) | | | 442 | | | 475 | | | 569 | | Other | | | 256 | | | 252 | | | 251 | | | | | 971 | | | 987 | | | 1,042 | |
The changes in the present value of the accrued defined benefit obligations were as follows: | | | | | | | | | | | Defined Benefit | | | | | Pension Plans | | | | | 2019 | | | 2020 | | | | | | | | | | Present value of the obligations at the beginning of year | | | 6518 | | | 8,396 | | Current service cost (Note 42) | | | 147 | | | 273 | | Interest cost | | | 585 | | | 582 | | Benefits paid | | | (983) | | | (1,071) | | Actuarial (gains)/losses | | | 2,129 | | | 1,413 | | Other | | | — | | | (65) | | Present value of the obligations at the end of year | | | 8,396 | | | 9,528 | |
| | | | | | | | | | | Defined Benefit | | | | | Pension Plans | | | | | 2021 | | | 2022 | | | | | | | | | | Present value of the obligations at the beginning of year | | | 9,528 | | | 9,336 | | Current service cost (Note 42) | | | 260 | | | 222 | | Interest cost | | | 613 | | | 713 | | Benefits paid | | | (1,116) | | | (1,107) | | Actuarial (gains)/losses | | | 146 | | | 604 | | Personnel transfer | | | (95) | | | — | | Other | | | — | | | — | | Present value of the obligations at the end of year | | | 9,336 | | | 9,768 | |
The estimated duration of the defined benefit obligation is 13.35 years
The changes in the fair value of plan assets were as follows: | | | | | | | | | | | Defined Benefit | | | | | Pension Plan | | | | | 2019 | | | 2020 | | | | | | | | | | Fair value of plan assets at the beginning of year | | | 2,196 | | | 2,068 | | Actual return on plan assets | | | 347 | | | 308 | | Transfer of funds to defined contribution plan | | | (129) | | | (190) | | Benefits paid | | | (346) | | | — | | Fair value of plan assets at the end of year | | | 2,068 | | | 2,186 | |
| | | | | | | | | | | Defined Benefit | | | | | Pension Plan | | | | | 2021 | | | 2022 | | | | | | | | | | Fair value of plan assets at the beginning of year | | | 2,186 | | | 1,943 | | Actual return on plan assets | | | (48) | | | 14 | | Transfer of funds to defined contribution plan | | | — | | | (71) | | Benefits paid | | | (195) | | | (206) | | Fair value of plan assets at the end of year | | | 1,943 | | | 1,680 | |
The fair value of the plan assets is determined based on quoted market prices in active markets. The Bank does not expect to make contributions to post-employment benefit plans for the year ending December 31, 2021. The major categories of plan assets as a percentage over the total plan assets are as follows:
| | | | | | | | | | | Defined Benefit | | | | Pension Plan | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | Equity instruments | | | 34 | % | | 36 | % | Cash and debt instruments | | | 66 | % | | 64 | % |
| | | | | | | | | | | Defined Benefit | | | | Pension Plan | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | Equity instruments | | | 35 | % | | 38 | % | Cash and debt instruments | | | 65 | % | | 62 | % |
The fair value measurement of the financial instruments that comprises the plan assets is categorized as Level 1 since the inputs to the fair value measurement are quoted market prices in active markets. Sensitivity analysis Significant actuarial assumptions for the determination of the defined benefit obligation are discount rate, medical cost trend rate, annual salary increase, annual INPC growth and mortality. The sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. | ● | If the discount rate were fifty basis points higher (lower), the defined benefit obligation would decrease by 464430 million pesos (increase by 512473 million pesos). |
| ● | If the medical cost trend rate were fifty basis points higher (lower), the defined benefit obligation would increase by 165231 million pesos (decrease by 153210 million pesos). |
| ● | If the annual salary growth increases (decreases) by 0.50%, the defined benefit obligation would increase by 2213 million pesos (decrease by 2212 million pesos). |
| ● | If the annual INPC growth increases (decreases) by 0.50%, the defined benefit obligation would increase by 1214 million pesos (decrease by 1214 million pesos). |
| ● | If the mortality increases (decreases) by two years for men and women, the defined benefit obligation would decrease by 10561 million pesos (increase by 10458 million pesos). |
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation recognized in the consolidated balance sheet. d) Other disclosures Insurance operation agreement In July 2001, the Bank entered into a collective lifetime payment insurance operation agreement for certain retirees with Principal México Compañía de Seguros, S.A. de C.V. (Principal). Such agreement establishes that with the payment of the single premium by the Bank, Principal commits to paying insured retirees a lifetime payment until the death of the last insured retiree. Under such agreement, these insured persons would not affect the Bank’s net worth in the future, since the risks were transferred to Principal. However, in order to recognize the Bank’s legal obligation to its retirees in the consolidated balance sheet, the Bank recognizes the projected benefit obligation of the insured retirees surrendered to Principal under Provisions - Provisions for pensions and similar obligations, and a long-term account receivable with Principal, which is recognized also under Provisions - Provisions for pensions and similar obligations for the funds that it transferred thereto. The amount of the projected benefits obligation was calculated at the close of the year based on the estimates used for labor liabilities and the remaining personnel. As of December 31, 20192021 and 2020,2022, such liability was 746723 and 703696 million pesos, respectively. For presentation purposes, the arrangement has not impact on net assets as the asset and liability are offset. Transfer of employees
In December 2020, all employees from the subsidiaries Santander Servicios Corporativos, S.A. de C.V. and Santander Servicios Especializados, S.A. de C.V. were transferred to Banco Santander México. The past service cost recognized under Provisions (net) in the consolidated income statement was 13 million pesos.
e) Provisions for tax and legal matters i. Tax-related proceedings The Bank is a party to various tax claims for which it has recognized total provisions of 67424 million pesos and 355239 million pesos as of December 31, 20192021 and 2020,2022, respectively.
ii. Other tax issues The Bank operated until December 31, 2018 a branch in Nassau, Bahamas through which it carried out tax-free operations principally involving financial derivative instruments. The Mexican Tax Administration Service (Servicio de Administración Tributaria) reviewed the operations of the Nassau branch and determined that the Bank is liable for Mexican withholding taxes. During December 2009, the Bank negotiated a settlement with the Mexican Tax Administration Service for cumulative back withholding taxes on transactions carried out from 2004 through 2009. The Bank made settlement payments of 1 million pesos in 2018, 32020, 1 million pesos in 20192021 and 1 million pesos in 2020.2022. iii. Non-tax-related proceedings As of December 31, 20192021 and 2020, as a result of its business activities, the Bank has had certain claims and lawsuits representing contingent liabilities filed against it. Notwithstanding, Bank’s Management and its internal and external legal and labor advisers do not expect such proceedings to have a material effect in the consolidated financial statements in the event of an unfavorable outcome. As of December 31, 2019 and 2020,2022, the Bank has recognized provisions for the amounts of 1,4911,443 million pesos and 1,5432,557 million pesos, respectively, which are based on the opinion of internal and external legal advisers; Bank’s Management has assessed losses to be probable. Bank’s Management considers such provisions adequate and, based on its best estimates, does not believe that actual losses will vary materially from the recognized provisions. Additionally, during 2012 the daughters of Mr. Roberto Garza Sada, María del Carmen, Gabriela and Viviana Garza Delgado (Mrs. Garza Delgado), filed a lawsuit against the Bank, the Group and others (the defendants) arguing that the defendants acted negligently as trustee of a trust. The trust assets consisted of shares of Alfa, S.A.B. de C.V. (Alfa), the same ones that were delivered during 1999 in accordance with the instructions established by Mr. Roberto Garza in the trust agreement. Mrs. Garza Delgado believe that their rights were violated, alleging that the transfer of Alfa's shares was not valid. In March 2017, the defendants obtained a favorable first instance resolution, acquitting them of any obligation, which was confirmed by judgment in April 2018. However, a legal support was granted in favor of Mrs. Garza Delgado, ordering Banco Santander México to deliver the Alfa shares as well as pay damages, dividends and other losses. Banco Santander México has filed various constitutional review and complaint appeals against the previously mentioned writ of legal support, which have been dismissed and inadmissible by the National Supreme Court of Justice. As of today, a review presented by the Bank is pending in the Collegiate Courts based in the state of Nuevo León. Due to the current situation of the judicial procedure, Bank’s Management has recognized a provision to cover the risk originated by this claim in its consolidated financial statements as of December 31, 2022, the foregoing in accordance with the provisions of IAS 37. However, the amount of cash outflows and their settlement date is uncertain and any provision recognized does not constitute an admission of wrongdoing or legal liability on the part of the Bank. Banco Santander México will continue to vigorously defend its case with additional legal actions and resources before all the corresponding instances. The total amount of payments made by the Bank arising from litigation in 2018, 20192020, 2021 and 2020 is2022 are not material with respect to thesethe consolidated financial statements. During 2019 and 2020, the amount paid by the Bank to external lawyers was 294 million pesos and 219 million pesos, respectively, for the management of all the outstanding claims.
f) Provisions for off-balance sheet risk The Provisions for off-balance sheet risk are estimated with the same methodology used for calculating the allowance for impairment of loans and advances to customers.losses. Refer to Note 2.g above for further description. The breakdown of the off-balance sheet risks is as follows: | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 965 | | | 906 | | | 941 | | | 1,301 | Guarantees and loan commitments of commercial and public sector loans | | | 110 | | | 326 | | | 167 | | | 238 | | | | 1,075 | | | 1,232 | | | 1,108 | | | 1,539 |
As of December 31, 2020,2022, the breakdown of the Provisions for off-balance sheet risks by stages is as follows: | | | | | | | | | | | | | | | | | | | Provision for off-balance sheet risk | | Provision for off-balance sheet risk | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 695 | | | 177 | | | 34 | | | 906 | | | 1,140 | | | 150 | | | 11 | | | 1,301 | | | | | | | | | | | | | | | | | | | | | | | | | | Guarantees, documentary credits and loan commitments of commercial loans of small and medium-sized enterprises | | | 86 | | | 8 | | | 232 | | | 326 | | | 23 | | | 52 | | | 163 | | | 238 | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 781 | | | 185 | | | 266 | | | 1,232 | | | 1,163 | | | 202 | | | 174 | | | 1,539 |
As of December 31, 2020,2022, the transfers between stages of the Provisions for off-balance sheet risks is as follows: | | | | | | | | | | | | | | | | | | | | | | Provision for off-balance sheet risk | | Provision for off-balance sheet risk | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | As of January 1, 2020: | | | 916 | | | 144 | | | 15 | | | 1,075 | | As of January 1, 2022: | | | | 921 | | | 109 | | | 78 | | | 1,108 | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets derecognized during the period other than write-offs | | | — | | | — | | | — | | | — | | | (91) | | | (13) | | | (62) | | | (166) | Write-offs | | | — | | | — | | | — | | | — | | | (40) | | | (28) | | | (5) | | | (73) | Originated financial assets | | | — | | | — | | | — | | | — | | | 458 | | | 42 | | | 119 | | | 619 | Foreign exchange and other movements | | | (135) | | | 41 | | | 251 | | | 157 | | | (85) | | | 92 | | | 44 | | | 51 | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | 781 | | | 185 | | | 266 | | | 1,232 | | As of December 31, 2022 | | | | 1,163 | | | 202 | | | 174 | | | 1,539 |
25. Other liabilities The breakdown of Other liabilities is as follows: | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Sundry creditors | | | 9,025 | | | 14,698 | Cash balances undrawn | | | 155 | | | 142 | Accrued personnel obligations | | | 4,388 | | | 3,584 | Other obligations | | | 2,288 | | | 2,248 | Credit and debit card operation balances | | | 2,435 | | | 2,446 | | | | 18,291 | | | 23,118 |
| | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Sundry creditors | | | 9,433 | | | 13,736 | Cash balances undrawn | | | 127 | | | 373 | Accrued personnel obligations | | | 4,059 | | | 4,222 | Other obligations | | | 3,421 | | | 3,077 | Credit and debit card operation balances | | | 2,838 | | | 3,267 | | | | 19,878 | | | 24,675 |
26. Tax matters a) Income tax The components of Income tax expense for 2018, 20192020, 2021 and 20202022 are as follows: | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Current income tax expense: | | | | | | | | | | Tax expense for current year | | | 5,615 | | | 7,099 | | | 7,496 | Deferred income tax expense (benefit): | | | | | | | | | | Origination and reversal of temporary difference and usage (accrual) of tax carryforward benefits | | | (157) | | | (190) | | | (1,270) | Total Income tax | | | 5,458 | | | 6,909 | | | 6,226 |
| | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Current income tax expense: | | | | | | | | | | Tax expense for current year | | | 7,496 | | | 3,777 | | | 12,162 | Deferred income tax expense (benefit): | | | | | | | | | | Origination and reversal of temporary difference and usage (accrual) of tax carryforward benefits | | | (1,270) | | | 1,189 | | | (3,998) | Total Income tax | | | 6,226 | | | 4,966 | | | 8,164 |
b) Income tax reconciliation The reconciliation of the income tax calculated at the corporate income tax rate of 30% to the income tax recognized and the breakdown of the effective tax rate are as follows: | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | Profit before tax | | | 24,814 | | | 27,290 | | | 25,200 | | | | | | | | | | | | | Income tax at 30% | | | 7,444 | | | 8,187 | | | 7,560 | | | | | | | | | | | | | Increase/(Decrease) due to permanent differences | | | | | | | | | | | Of which: | | | | | | | | | | | Due to effect of inflation | | | (1,542) | | | (890) | | | (1,126) | | Due to effect of tangible assets | | | (76) | | | 19 | | | (116) | | Due to effect of non-deductible expenses, non-taxable income and others | | | (368) | | | (407) | | | (92) | | Income Tax | | | 5,458 | | | 6,909 | | | 6,226 | | | | | | | | | | | | | Effective tax rate | | | 22.00 | % | | 25.32 | % | | 24.71 | % | Current tax liability | | | — | | | — | | | — | | | | | | | | | | | | | Income tax | | | 5,458 | | | 6,909 | | | 6,226 | | Of which: | | | | | | | | | | | Current | | | 5,615 | | | 7,099 | | | 7,496 | | Deferred | | | (157) | | | (190) | | | (1,270) | |
| | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | Profit before tax | | | 25,200 | | | 25,767 | | | 32,272 | | | | | | | | | | | | | Income tax at 30% | | | 7,560 | | | 7,730 | | | 9,682 | | | | | | | | | | | | | Increase/(Decrease) due to permanent differences | | | | | | | | | | | Of which: | | | | | | | | | | | Due to effect of inflation | | | (1,126) | | | (2,775) | | | (3,023) | | Due to effect of tangible assets | | | (116) | | | (243) | | | (387) | | Due to effect of non-deductible expenses, non-taxable income and others | | | (92) | | | 254 | | | 1,892 | | Income Tax | | | 6,226 | | | 4,966 | | | 8,164 | | | | | | | | | | | | | Effective tax rate | | | 24.71 | % | | 19.27 | % | | 25.30 | % | Current tax liability | | | — | | | — | | | — | | | | | | | | | | | | | Income tax | | | 6,226 | | | 4,966 | | | 8,164 | | Of which: | | | | | | | | | | | Current | | | 7,496 | | | 3,777 | | | 12,162 | | Deferred | | | (1,270) | | | 1,189 | | | (3,998) | |
The Bank is subject to regular reviews by the Mexican Tax Administration Service (Servicio de Administración Tributaria). As of December 31, 2020,2022, there are no material tax contingencies arising because of such tax reviews requiring disclosure.contingencies.
c) Tax recognized in consolidated total equity In addition to the income tax recognized in the consolidated income statement, the Bank recognized the following amounts in consolidated total equity: | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Net tax credited/(charged) to consolidated total equity: | | | | | | | | | | | Remeasurement of defined benefit obligation | | | (64) | | | 462 | | | 264 | | Measurement of Financial assets at fair value through other comprehensive income – Debt instruments | | | 371 | | | (980) | | | (1,056) | | Measurement of financial derivatives (Cash flow hedges) | | | 276 | | | (6) | | | 126 | | Paid interests on Subordinated Additional Tier I Capital Notes | | | 254 | | | 255 | | | 290 | | Income tax from sale of the Custody business | | | 255 | | | — | | | — | | | | | 1,092 | | | (269) | | | (376) | |
| | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Net tax credited/(charged) to consolidated total equity: | | | | | | | | | | | Remeasurement of defined benefit obligation | | | 264 | | | 16 | | | 149 | | Measurement of Financial assets at fair value through other comprehensive income – Debt instruments | | | (1,056) | | | 1,402 | | | 2,210 | | Measurement of financial derivatives (Cash flow hedges) | | | 126 | | | (422) | | | 365 | | Paid interests on Subordinated Additional Tier I Capital Notes | | | 290 | | | — | | | 276 | | | | | (376) | | | 996 | | | 3,000 | |
d) Deferred tax assets and liabilities Main components of the Bank’s gross deferred tax assets and liabilities are as follows: | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | Total deferred tax assets prior to offsetting | | | 20,757 | | | 21,340 | | Of which: | | | | | | | | Tangible assets and deferred charges | | | 2,050 | | | 2,146 | | Provisions | | | 2,268 | | | 2,288 | | Impairment losses on financial assets at amortized cost | | | 10,010 | | | 10,277 | | Net operating losses carryforward (*) | | | — | | | 4 | | Capital losses carryforward (*) | | | 2,708 | | | 2,660 | | Labor provisions | | | 1,435 | | | 1,416 | | Fees and interest collected in advance | | | 995 | | | 1,053 | | Foreign exchange rate financial derivatives | | | 1,291 | | | 1,496 | | Total deferred tax liabilities prior to offsetting | | | (3,461) | | | (3,440) | | Of which: | | | | | | | | Unrealized gains on financial instruments | | | (2,816) | | | (2,512) | | Prepayments | | | (347) | | | (777) | | Other | | | (298) | | | (151) | |
| | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | Total deferred tax assets prior to offsetting | | | 19,295 | | | 26,719 | | Of which: | | | | | | | | Tangible assets and deferred charges | | | 2,288 | | | 2,902 | | Provisions | | | 2,444 | | | 2,305 | | Impairment losses on financial assets at amortized cost | | | 8,620 | | | 11,971 | | Valuation of financial instruments | | | — | | | 2,908 | | Net operating losses carryforward (*) | | | 1 | | | — | | Capital losses carryforward (*) | | | 2,333 | | | 2,129 | | Labor provisions | | | 1,238 | | | 1,482 | | Fees and interest collected in advance | | | 1,299 | | | 2,703 | | Foreign exchange rate financial derivatives | | | 1,072 | | | 319 | | Total deferred tax liabilities prior to offsetting | | | (1,690) | | | (2,270) | | Of which: | | | | | | | | Unrealized gains on financial instruments | | | (517) | | | — | | Prepayments | | | (1,022) | | | (1,188) | | Labor provisions | | | — | | | (738) | | Other | | | (151) | | | (344) | |
| (*) | The net operating losses carryforward and the capital losses carryforward can be deducted during the ten-year period following the fiscal year in which the net operating loss and the capital loss were originated. |
As of December 31, 2020,2022, the detail of capital losses carryforward is as follows: | | | | | | | | | | | | | | | Year of origination | | | Year of expiration | | | Amount | | | Deferred tax asset | | | Year of expiration | | | Amount | | | Deferred tax asset | | | | | | | | | | | | | | | | | | | | 2017 | | | 2027 | | | 498 | | | 149 | | 2018 | | | 2028 | | | 3,297 | | | 989 | | | 2028 | | | 1,646 | | | 494 | 2019 | | | 2029 | | | 2,562 | | | 769 | | | 2029 | | | 1,975 | | | 592 | 2020 | | | 2030 | | | 2,509 | | | 753 | | | 2030 | | | 1,934 | | | 580 | 2021 | | | | 2031 | | | 782 | | | 235 | 2022 | | | | 2032 | | | 762 | | | 229 | | | | | | | 8,866 | | | 2,660 | | | | | | 7,097 | | | 2,129 |
The Bank only recognizes deferred tax assets for temporary differences and tax credit carryforward where it is considered probable that the consolidated entities that generated them will have sufficient future taxable profits against which they can be utilized. After offsetting, deferred tax assets and liabilities are presented in the consolidated balance sheet as follows: | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | Presented as deferred tax assets (*) | | | 17,401 | | | 18,087 | | Presented as deferred tax liabilities | | | (105) | | | (187) | | Net | | | 17,296 | | | 17,900 | |
| | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | Presented as deferred tax assets | | | 18,111 | | | 24,662 | | Presented as deferred tax liabilities | | | (506) | | | (213) | | Net | | | 17,605 | | | 24,449 | |
Deferred tax assets represent the deferred tax asset whose realization is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences. Bank’s Management has concluded that the realization of such assets is probable based on the Bank’s history of generating sufficient taxable income to utilize all available tax benefits. The change in the balance of deferred tax assets and deferred tax liabilities does not equal the deferred income tax expense/(benefit). This is due to deferred taxes that are recognized directly in consolidated total equity and the acquisition and disposal of entities as part of ordinary activities.equity. The changes in the total deferred tax assets and liabilities, prior to offsetting, in the last two years were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | (Charge)/ | | | | | | | | | | | | | | | | Credit to | | | | | | | | | | | | | | | | Consolidated | | | | | | | | | | | | | (Charge)/ Credit to | | | Other | | | | | | | | | | | | | Consolidated | | | Comprehensive | | Other | | | | | | | | 01/01/2021 | | | Income | | | Income | | Movements | | | 12/31/2021 | | | | | | | | | | | | | | | | | | | Deferred tax assets | | | 21,340 | | | (1,116) | | | (602) | | | (327) | | | 19,295 | | Deferred tax liabilities | | | (3,440) | | | (73) | | | 1,598 | | | 225 | | | (1,690) | | | | | 17,900 | | | (1,189) | | | 996 | | | (102) | | | 17,605 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | (Charge)/ | | | | | | | | | | | | | | | | Credit to | | | | | | | | | | | | | | | | Consolidated | | | | | | | | | | | | | (Charge)/ Credit to | | | Other | | | | | | | | | | | | | Consolidated | | | Comprehensive | | Other | | | | | | | | 01/01/2019 | | | Income | | | Income | | Movements | | | 12/31/2019 | | | | | | | | | | | | | | | | | | | Deferred tax assets | | | 20,791 | | | 881 | | | (915) | | | — | | | 20,757 | | Deferred tax liabilities | | | (3,304) | | | (691) | | | 462 | | | 72 | | | (3,461) | | | | | 17,487 | | | 190 | | | (453) | | | 72 | | | 17,296 | |
F-152 | | | | | | | | | | | | | | | | | | | | | | | | | | (Charge)/ | | | | | | | | | | | | | | | | | Credit to | | | | | | | | | | | | | | | | | Consolidated | | | | | | | | | | | | | | (Charge)/ Credit to | | | Other | | | | | | | | | | | | | | Consolidated | | | Comprehensive | | | Other | | | | | | | | 01/01/2022 | | | Income | | | Income | | | Movements | | | 12/31/2022 | | | | | | | | | | | | | | | | | | | Deferred tax assets | | | 19,295 | | | 5,229 | | | 2,399 | | | (204) | | | 26,719 | | Deferred tax liabilities | | | (1,690) | | | (1,231) | | | 601 | | | 50 | | | (2,270) | | | | | 17,605 | | | 3,998 | | | 3,000 | | | (154) | | | 24,449 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | (Charge)/ | | | | | | | | | | | | | | | | | Credit to | | | | | | | | | | | | | | | | | Consolidated | | | | | | | | | | | | | | (Charge)/ Credit to | | | Other | | | | | | | | | | | | | | Consolidated | | | Comprehensive | | | Other | | | | | | | | 01/01/2020 | | | Income | | | Income | | | Movements | | | 12/31/2020 | | | | | | | | | | | | | | | | | | | Deferred tax assets | | | 20,757 | | | 1,430 | | | (280) | | | (567) | | | 21,340 | | Deferred tax liabilities | | | (3,461) | | | (160) | | | (96) | | | 277 | | | (3,440) | | | | | 17,296 | | | 1,270 | | | (376) | | | (290) | | | 17,900 | |
27. Non-controlling interests Non-controlling interests include the net amount of the equity of subsidiaries attributable to equity instruments that do not belong, directly or indirectly, to the Bank, including the portion attributed to them of profit for the year.
a) Breakdown The breakdown by subsidiary of Equity - Non-controlling interests is as follows: | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Equity as of balance-sheet date attributable to non-controlling interests: | | | | | | | Of which: | | | | | | | Fideicomiso GFSSLPT, Banco Santander México, S.A. | | | 27 | | | 23 | Other | | | 13 | | | 14 | | | | 40 | | | 37 | Profit for the year attributable to non-controlling interests: | | | | | | | Of which: | | | | | | | Fideicomiso GFSSLPT, Banco Santander México, S.A. | | | — | | | — | | | | | | | |
| | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Equity as of balance-sheet date attributable to non-controlling interests: | | | | | | | Of which: | | | | | | | Fideicomiso GFSSLPT, Banco Santander México, S.A. | | | 37 | | | 51 | Other | | | 11 | | | 11 | | | | 48 | | | 62 | Profit for the year attributable to non-controlling interests: | | | | | | | Of which: | | | | | | | Fideicomiso GFSSLPT, Banco Santander México, S.A. | | | — | | | — | | | | | | | |
b) Changes The changes in Non-controlling interests are summarized as follows: | | | | | | | | | | 2019 | | | 2020 | | | | | | | | Beginning balance | | | 32 | | | 40 | Profit for the year attributable to non-controlling interests | | | — | | | — | Other | | | 8 | | | (3) | Balance at year-end | | | 40 | | | 37 |
| | | | | | | | | | 2021 | | | 2022 | | | | | | | | Beginning balance | | | 37 | | | 48 | Profit for the year attributable to non-controlling interests | | | — | | | — | Other | | | 11 | | | 14 | Balance at year-end | | | 48 | | | 62 |
The foregoing changes are shown in the consolidated statement of changes in equity. 28. Valuation adjustments The balance of Valuation adjustments includeincludes the amounts, net of the related deferred income tax effect, of the adjustments to assets and liabilities recognized temporarily in consolidated total equity through other comprehensive income. The amounts arising from subsidiaries are presented, on a line-by-line basis, in the appropriate items according to their nature. It should be noted that the consolidated statement of comprehensive income presents items separately according to their nature, grouping together those, which pursuant to the applicable IFRS, will not be subsequently reclassified to the consolidated income statement when the requirements established by the related IFRS are met. RespectIn relation to items that may be reclassified to the consolidated income statement, the consolidated statement of comprehensive income includes changes in Valuation adjustments as follows:
a) Financial assets at fair value through other comprehensive income Valuation adjustments – Financial assets at fair value through other comprehensive income include the net amount of unrealized gains or losses in the valuation of financial assets at fair value through other comprehensive income (see Notes 8 and 9).
The breakdown by type of financial instrument of Valuation adjustments – Financial assets at fair value through other comprehensive income at December 31, 20192021 and 20202022 are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | Net | | | | | | | | | | | | Net | | | | | | | | | | | | | Valuation | | | | | | | | | | | | Valuation | | | | | | | Valuation | | | Valuation | | | Gains/ | | | Fair | | | Valuation | | | Valuation | | | Gains/ | | | Fair | | | | Gains | | | Losses | | | (Losses) | | | Value | | | Gains | | | Losses | | | (Losses) | | | Value | | | | | | | | | | | | | | | | | | | | | | | | | | Debt instruments | | | 4,266 | | | (158) | | | 4,108 | | | 233,463 | | | 5,944 | | | (2,384) | | | 3,560 | | | 355,321 | Loans and advances to customers | | | — | | | — | | | — | | | 2,875 | | | — | | | — | | | — | | | — | Equity instruments | | | 111 | | | (4) | | | 107 | | | 642 | | | 170 | | | (44) | | | 126 | | | 768 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | Net | | | | | | | | | | | | Net | | | | | | | | | | | | | Valuation | | | | | | | | | | | | Valuation | | | | | | | Valuation | | | Valuation | | | Gains/ | | | Fair | | | Valuation | | | Valuation | | | Gains/ | | | Fair | | | | Gains | | | Losses | | | (Losses) | | | Value | | | Gains | | | Losses | | | (Losses) | | | Value | | | | | | | | | | | | | | | | | | | | | | | | | | Debt instruments | | | 1,972 | | | (8,695) | | | (6,724) | | | 390,974 | | | 682 | | | (7,387) | | | (6,705) | | | 313,906 | Loans and advances to customers | | | — | | | — | | | — | | | 4,056 | | | — | | | — | | | — | | | 946 | Equity instruments | | | (76) | | | — | | | (76) | | | 799 | | | — | | | (18) | | | (18) | | | 697 |
A summary of changes in the cumulative valuation adjustments recordedcorresponding to Financial assets at fair value through other comprehensive income is as follows: | | | | | | | | | | | | | | Debt | | | Equity | | | | | | | | Instruments | | | Instruments | | | Total | | | | | | | | | | | | | Balance at January 1, 2019 | | | (675) | | | (20) | | | (695) | | Valuation adjustments | | | 4,108 | | | 107 | | | 4,215 | | Amounts reclassified to consolidated income statement | | | (189) | | | — | | | (189) | | Allowance for impairment losses | | | — | | | — | | | — | | Income taxes | | | (980) | | | (32) | | | (1,012) | | Balance at December 31, 2019 | | | 2,264 | | | 55 | | | 2,319 | | Valuation adjustments | | | 3,560 | | | 126 | | | 3,686 | | Amounts reclassified to consolidated income statement | | | (843) | | | — | | | (843) | | Income taxes | | | (1,056) | | | (33) | | | (1,089) | | Balance at December 31, 2020 | | | 3,925 | | | 148 | | | 4,073 | |
| | | | | | | | | | | | | | Debt | | | Equity | | | | | | | | Instruments | | | Instruments | | | Total | | | | | | | | | | | | | Balance at January 1, 2021 | | | 3,925 | | | 148 | | | 4,073 | | Valuation adjustments | | | (6,724) | | | (76) | | | (6,800) | | Amounts reclassified to consolidated income statement | | | (781) | | | — | | | (781) | | Income taxes | | | 1,402 | | | 23 | | | 1,425 | | Balance at December 31, 2021 | | | (2,178) | | | 95 | | | (2,083) | | Valuation adjustments | | | (6,705) | | | (18) | | | (6,723) | | Amounts reclassified to consolidated income statement | | | (113) | | | 72 | | | (41) | | Income taxes | | | 2,236 | | | (26) | | | 2,210 | | Balance at December 31, 2022 | | | (6,760) | | | 123 | | | (6,637) | |
b) Cash flow hedges Valuation adjustments – Cash flow hedges include the gains or losses attributable to hedging financial derivative instruments that qualify as effective hedges. These amounts will remain under this heading until they are reclassified in the consolidated income statement in the periods in which the hedged items affect the consolidated income statement (see Note 12). The breakdown of the accumulated gain or loss on the effective portion of the hedging to the cumulative valuation adjustment for cash flow hedges is presented as follows: | | | | | | | | | | 2019 | | | 2020 | | | | | | | | Accumulated (loss)/gain on cash flow hedges | | | (293) | | | (556) | Accumulated gain related to discontinued cash flow hedges (Note 12) | | | 17 | | | (13) | Balance at December 31, | | | (276) | | | (569) |
| | | | | | | | | | 2021 | | | 2022 | | | | | | | | Accumulated (loss)/gain on cash flow hedges | | | 420 | | | (437) | Accumulated gain related to discontinued cash flow hedges (Note 12) | | | (6) | | | — | Balance at December 31, | | | 414 | | | (437) |
29. Shareholders’ equity a) Share capital As of December 31, 20192021 and 2020,2022, Share capital, at par value, was as follows: | | | | | | | | | | | | | | | | | | | | | | Total Par Value | | | | Number of shares | | | (Millions of Pesos) | | | | 12/31/2019 | | | 12/31/2020 | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | | | | | Fixed capital: | | | | | | | | | | | | | Series F shares | | | 3,464,309,145 | | | 3,464,309,145 | | | 13,098 | | | 13,098 | Series B shares | | | 3,322,685,212 | | | 3,322,685,212 | | | 12,562 | | | 12,562 | | | | 6,786,994,357 | | | 6,786,994,357 | | | 25,660 | | | 25,660 | | | | | | | | | | | | | | Authorized unsubscribed capital: | | | | | | | | | | | | | Series F shares | | | 331,811,068 | | | 331,811,068 | | | — | | | — | Series B shares | | | 318,188,932 | | | 318,188,932 | | | — | | | — | | | | 650,000,000 | | | 650,000,000 | | | — | | | — | | | | 7,436,994,357 | | | 7,436,994,357 | | | 25,660 | | | 25,660 |
| | | | | | | | | | | | | | | | | | | | | | Total Par Value | | | | Number of shares | | | (Millions of Pesos) | | | | 12/31/2021 | | | 12/31/2022 | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | | | | | Fixed capital: | | | | | | | | | | | | | Series F shares | | | 3,464,309,145 | | | 3,464,309,145 | | | 13,098 | | | 13,098 | Series B shares | | | 3,322,685,212 | | | 3,322,685,212 | | | 12,562 | | | 12,562 | | | | 6,786,994,357 | | | 6,786,994,357 | | | 25,660 | | | 25,660 | | | | | | | | | | | | | | Authorized unsubscribed capital: | | | | | | | | | | | | | Series F shares | | | 921,514,867 | | | 921,514,867 | | | — | | | — | Series B shares | | | 883,785,133 | | | 883,785,133 | | | — | | | — | | | | 1,805,300,000 | | | 1,805,300,000 | | | — | | | — | | | | 8,592,294,357 | | | 8,592,294,357 | | | 25,660 | | | 25,660 |
Share capital is comprised of fixed shares, which cannot be increased and variable shares, which may be increased without limit. Series F shares may only be acquired by the Parent company or, directly or indirectly, by Banco Santander, S.A. (Spain), except when such shares are transferred in guarantee or in ownership to the Mexican Bank Savings Protection Institute (Instituto para la Protección al Ahorro Bancario, hereinafter “IPAB”). These shares can only be sold with the prior authorization of SHCP. No authorization shall be required from such Authority and, corporate bylaws will not have to be amended when the transfer of shares is in either guarantee or ownership to the IPAB. At all times, Series F share capital shall represent at least 51% of share capital and Series B share capital can represent up to 49% of the share capital. Foreign governments may not direct or indirectly own any share capital of the Bank,Banco Santander México, except when: i) they do it temporarily as part of financial supporting or bailout; ii) they do it through official entities and iii) they do it indirectly and do not have control on the Bank,Banco Santander México, pursuant Article 13 of the Credit Institutions Law. All the aforementioned exceptions must be authorized by the CNBV. Capital reductions will incur taxation on the excess of the amount distributed against the corresponding tax value determined according to the Income Tax Law (Ley del Impuesto sobre la Renta). As mentioned in Note 3, Banco Santander (Spain) increased its participation in the Bank;Banco Santander México; after this transaction, the shareholders’ structure is as follow: | | | | | | | | | | Prior to exchange offer | After exchange offer | | | | | | | | | Banco Santander (Spain) | | | 74.96% | | | 91.64% | | Minority shareholders | | | 25.04% | | | 8.36% | | | | | | | | | |
| | | | | | | | | | Prior to exchange offer | After exchange offer | | | | | | | | | Banco Santander (Spain) | | | 91.64% | | | 96.16% | | Minority shareholders | | | 8.36% | | | 3.84% | | | | | | | | | |
F-173
b) Share premium Share premium includes the amount paid up by the Bank’sBanco Santander México’s shareholders in capital issues in excess of the par value. The Mexican Corporation Law (Ley General de Sociedades Mercantiles) expressly permits the use of the share premium account balance to increase capital and does not establish any specific restrictions as to its use. c) Accumulated reserves Accumulated reserves include the net amount of the accumulated profit recognized in previous years in the consolidated income statement that was appropriatednot distributed to consolidated total equity,shareholders, the legal reserve, the differences between the selling price of treasury shares and its cost of acquisition thereof and the remeasurement of the defined benefit obligation and the recognition of equity-settled share-based payments. Accumulated profit
This includes the accumulated profit not distributed to shareholders.obligation.
Dividend policy and payment of dividends Income tax must be paid in the event that payment of dividends from profits is not previously subject to income tax. Accordingly, the BankBanco Santander México must keep track of profits subject to each rate and maintain such accumulated profits in a Net tax profit account (Cuenta de Utilidad Fiscal Neta). In accordance with amendments to the Income Tax Law, dividends paid from profits earned in fiscal year 2014 and thereafter by Mexican companies to Mexican resident individuals or foreign residents (including foreign corporations) are subject to an additional withholding tax of 10%. International tax treaties may apply to avoid double taxation on dividends paid to overseas shareholders. Dividends paid by the BankBanco Santander México to Mexican resident individuals and foreign residents in 2018, 20192020, 2021 and 20202022 are not subject to the 10% additional withholding tax as such dividends were paid from profits obtained prior to 2014. Legal reserve The BankBanco Santander México is subject to the legal reserve provision whereby at least 10% of net profits each year must be allocated and transferred to a capital reserve fund until reaching the equivalent of 100% of the paid-in share capital. Regarding Bank’sBanco Santander México’s subsidiaries, the legal reserve provision requires the creation of a legal reserve equal to 5% of net profits until reaching 20% of paid-in share capital. The legal reserve cannot be distributed to the shareholders during the existence of the aforementioned entities, except in the form of a stock dividend.
As of December 31, 20192021 and 2020,2022, Banco Santander México and its subsidiaries comply with the percentage of legal reserve required. Treasury shares Transactions involving own equity instruments are recognized directly in consolidated total equity, and no profit or loss may be recognized on these transactions. The costs of any transaction involving own equity instruments are deducted directly from consolidated total equity, net of any related income tax effect.
d) Other disclosures During the Ordinary General Annual Meeting of April 28, 2017, the following resolution was adopted:
| -
| The amount of 4,234 million pesos was allocated from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on May 30, 2017.
|
The aforementioned dividend paid to shareholders was taken from the Net tax profit account.
During the Ordinary and Extraordinary General Meeting of December 8, 2017, the following resolutions were adopted:
| -
| The amount of 4,676 million pesos was allocated from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on December 27, 2017.
|
The aforementioned dividend paid to shareholders was taken from the Net tax profit account.
| -
| It was agreed to carry out a corporate restructuring process, which considers, among other corporate actions, the merger of Grupo Financiero Santander México, S.A.B. de C.V. (hereinafter, “the Former Group”), as the merged entity, with Banco Santander México, as the merging entity.
|
To carry out this merger, the following resolutions were adopted:
| i. | Increase the share capital of Banco Santander México by capitalizing the share premium for 17,574 million pesos, through the issuance of 175,746,122,497 shares, with a nominal value of 0.10 pesos per share, of which 147,353,683,122 shares correspond to the Series F and 28,392,439,375 shares correspond to the Series B. |
| ii. | Perform an equity concentration (reverse split) by increasing the nominal value of Banco Santander México’s shares from 0.10 pesos per share to 3.780782962 and decreasing the number of outstanding shares. Because of the reverse split, 264,464,365,125 shares representing the share capital of Banco Santander México were cancelled and 6,994,962,889 new shares representing the share capital of Banco Santander México were issued. |
| iii. | Complete the exchange of shares between Banco Santander México and the Former Group once the merger has been registered in the Public Registry of Commerce. The exchange of shares will be carried out by cancelling the shares representing the Former Group and the issuance of new shares of Banco Santander México whose holders will be the shareholders of the Former Group. |
| iv. | Increase the unsubscribed share capital of Banco Santander México by 1,671 million pesos through the cancellation of 207,968,532 treasury shares and the issuance of 650,000,000 new shares representing Banco Santander México's share capital, which will be held as treasury shares by Banco Santander México to guarantee the conversion of the Subordinated Additional Tier I Capital Notes issued by Banco Santander México in December 2016 (see Note 22). |
Additionally, a decree and payment of a cash dividend to the shareholders of the Former Group was approved for an amount up to 1,950 million pesos in order to equal to one the book value of the shares of the Former Group with those of Banco Santander México. The final amount of the dividend to make equivalent to one the book value of the shares of the Former Group with those of Banco Santander México amounted to 1,822 million pesos, which was paid on January 25, 2018.
The aforementioned dividend paid to shareholders was taken from the Net tax profit account.
All aforementioned resolutions were effective on January 26, 2018, once the Ordinary and Extraordinary General Meeting minute and the merger agreements between Banco Santander México and the Former Group were registered in the Public Registry of Commerce. On the same date, the delivery of Banco Santander México's shares through S.D. Indeval, S.A. de C.V. (INDEVAL), Institución para el Depósito de Valores to Banco Santander México’s shareholders was completed.
During the Ordinary General Annual Meeting of February 21, 2018, it was decided to approve the creation of a fund to repurchase own shares by an amount of 12,800 million pesos. Based on the aforementioned approval, during the period ended December 31, 2018, Banco Santander México acquired 5,671,453 own shares that amounted to 145 million pesos.
During the Ordinary and Extraordinary General Annual Meeting of April 30, 2018, it was decided to allocate 4,279 million pesos from Accumulated reserves for the payment of dividends, which were paid to shareholders on June 29, 2018.
The aforementioned dividend paid to shareholders was taken from the Net tax profit account.
During the Ordinary General Meeting of December 3, 2018, it was decided to allocate 4,949 million pesos from Accumulated reserves for the payment of dividends, which were paid to shareholders on December 28, 2018.
The aforementioned dividend paid to shareholders was taken from the Net tax profit account.
During the Ordinary General Annual Meeting of April 29, 2019, the following resolutions were adopted:
| - | It was decided to ratify the fund to repurchase own shares that amounts to 12,800 million pesos. |
| - | The amount of 4,843 million pesos was allocated from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on May 28, 2019. |
The aforementioned dividend paid to shareholders was taken from the Net tax profit account.
During the Ordinary General Meeting of November 28, 2019, it was decided to allocate 5,450 million pesos from Accumulated reserves for the payment of dividends, which were paid to shareholders on December 27, 2019.
The aforementioned dividend paid to shareholders was taken from the Net tax profit account.
During the Ordinary General Annual Meeting of April 28, 2020, it was decided to ratify the fund to repurchase own shares by an amount of 12,800 million pesos. During the Extraordinary General Meeting of June 15, 2020, it was decided to increase the limit for the issuance of securities to USD 10 billion, which may be issued as any of the following: | (i) | debt issued in local or international markets; |
| (ii) | senior or subordinated debt, including in both cases preferred or non-preferred financial instruments, and debt instruments that, from a regulatory point of view, are classified as capital; |
| (iii) | individual issuances or through one or more programs; and |
| (iv) | having a maximum period of fifteen years, or, if appropriate, the maturity determined by the Board of Directors or, where appropriate by a shareholders' meeting. |
During the Extraordinary General Meeting of September 30, 2020, it was approved to carry out the merger of Banco Santander México, as the merging entity, with Santander Vivienda, as the merged entity (see Note 3). During the Extraordinary General Meeting of April 20, 2021, the following resolutions were adopted: | - | It was decided to issue perpetual subordinated non-preferred contingent convertible additional Tier I Capital Notes up to USD 700 million (see Note 3). |
| - | It was decided to increase the share capital of Banco Santander México for 4,368 million pesos, through the issuance of 1,155,300,000 shares, with a nominal value of 3.78 pesos per share, of which 589,703,799 shares correspond to the Series F and 565,596,201 shares correspond to the Series B, which will be kept in the treasury of the Bank as authorized capital to guarantee the possible conversion of obligations into shares of the previous point. |
During the Ordinary General Annual Meeting of April 29, 2021, the following resolutions were adopted: | - | The amount of 1,494 million pesos was allocated from Accumulated reserves for the legal reserve. |
| - | It was decided to ratify the fund to repurchase own shares that had been approved during the Ordinary General Annual Meeting of February 21, 2018, amounting to 12,800 million pesos. |
During the Ordinary and Extraordinary General Meeting of June 9, 2021, it was approved the amount of 3,054 million pesos from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on June 18, 2021. During the Ordinary and Extraordinary General Meeting of October 25, 2021, it was approved the amount of 1,867 million pesos from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on November 5, 2021. During the Ordinary General Annual Meeting of April 29, 2022, the following resolutions were adopted: | - | The amount of 1,260 million pesos was allocated from Accumulated reserves for the legal reserve. |
| - | It was decided to ratify the fund to repurchase own shares that had been approved during the Ordinary General Annual Meeting of February 21, 2018, amounting to 12,800 million pesos. |
| - | It was approved the amount of 9,040 million pesos from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on June 28, 2022. |
During the Ordinary and Extraordinary General Meeting of July 19, 2022, the amount of 8,838 million pesos was allocated from Accumulated reserves for the payment of dividends. This amount was paid to shareholders on July 28, 2022. During the Extraordinary General Meeting of November 30, 2022, the following resolutions were adopted: | - | Cancel the registration of all the shares representing the capital stock of the Bank in the National Securities Registry maintained by the CNBV and remove from the Mexican Stock Exchange, S.A.B. of C. V. |
| - | It was approved the withdrawal of the ADSs from the listing on the New York Stock Exchange and the withdrawal of the Series "B" Shares representing the capital stock of the Bank and such ADSs of registration with the SEC. |
| - | It was approved to be carried out the exchange offer in Mexico and the United States of America for all the Series "B" Shares representing the Bank's capital stock and the ADSs, that are issued and in circulation, and that are not owned directly or indirectly, by Banco Santander (Spain). |
30. Minimum capital requirements The Bank’sBanco Santander México’s risk-weighted assets and capitalization ratios are calculated in accordance with Mexican Banking GAAP. The management of capital is performed at regulatory and economic levels.
As established in the General Provisions ApplicableThe Bank is subject to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito)issuedcapital adequacy requirements adopted by the CNBV Banco Santander México must maintainwhich provide for a minimum net capital in relation to theratio for operations of risk-weighted assets for credit, market credit and operational risks inherentrisk of 8%, along with: a 2.5% capital conservation buffer, a 1.20% domestic-systemically important bank supplement (in the Grade III category), and a counter-cyclical capital buffer (currently at 0.0%), that combined add up to its operations, which is based onan 11.70% capital requirement. As of December 31, 2022, the Basel Agreements within the Mexican legislation. Bank maintains capital indices above regulatory levels.
Such minimum capital is determined based on the sum of the capital requirements stipulated for each aforementioned type of risk. Net Capital Net capital is divided into two parts: Basic Capital and Complementary Capital. Additionally, Basic Capital is divided into two portions: Fundamental Basic Capital and Non-Fundamental Basic Capital. Basic Capital (Tier I Capital) is the sum of Fundamental Basic Capital and Non-Fundamental Basic Capital. | - | Fundamental Basic Capital is composed mainly of shareholders’ equity plus other equity instruments, less, among other deductions: stock investments on financial institutions, organizational expenses, other intangibles assets, excess of deferred tax assets derived from tax losses of Tier I Capital and excess of deferred income taxes from temporary differences that exceed the 10% of Tier I Capital. |
| - | Non-Fundamental Basic Capital is composed mainly of a bank’s equity instruments, which are not included as Fundamental Basic Capital according to the current legislation. |
| - | Complementary Capital (Tier II Capital) is composed mainly of a bank’s equity instruments, which are not included as Basic Capital according to the current legislation, and the positive difference resulting from subtracting to the total permitted reserves, the total expected losses, up to an amount that does not exceed 0.6% of the assets subject to credit risk. |
Assets Subject to Credit Risk Deposits, securities, loans and advances, reverse repurchase agreements, swaps, forward contracts, securities loans, options, certain financial derivative instruments and all other bank transactions exposed to credit risk in accordance with established regulations are classified in their respective risk groups and the weight factors stipulated for each group are applied, ranging from zero up to 150%, depending on the counterparty and scores determined by the ratings agencies accredited by the CNBV or by the BankBanco Santander México in the event it is an authorized institution for the use of internal models. Counterparty risk is calculated by incorporating an add-on and calculating a CVA for OTC financial derivatives transactions. Since September 2021, the CNBV has published new credit risk weights applicable to new loans originated since September 1 that belong to retail (mortgages and consumer) and SMEs portfolios. Assets Subject to Market Risk In interest bearing transactions, the capital requirement is calculated by determining the residual term of the financial asset or financial liability and by applying the corresponding Market Risk Charge Coefficient based on the residual term and currency of the financial asset or financial liability. For those transactions, whose return is based on changes in the price of a share, basket of shares or market index, a 22.23% of General Market Risk Charge Coefficient is applied to the net position, to which additional specific market risk requirements are added for long net positions and short net positions by 8%.
For foreign currency positions, a 12% Market Risk Charge Coefficient is applied on the higher of the sum of the long net position or short net position. For transactions linked to Mexican inflation and denominated in UDI, a capital requirement is calculated by applying a Market Risk Charge Coefficient of 1.25% over the increase of the INPC (calculated as the average of the previous twelve months) to the absolute value of the total net position. For options and warrants, a Vega (variations on volatility) and Gamma (variations on the subjacent) capital requirement is calculated by applying the rules defined on Article 2 bis 109 of the General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) issued by the CNBV. For transactions linked to the annual minimum salary growth, a capital requirement is calculated by applying a Market Risk Charge Coefficient of 1.25% over the increase of the annual minimum salary growth (calculated as the average of the current month and the previous eleven months) to the absolute value of the total net position. The equivalent assets for market risk are determined by multiplying by 12.5, the sum of the capital requirements of all the transactions described above. Assets Subject to Operational Risk Since November 2016, the BankBanco Santander México uses the Alternative Standardized Approach under Basel II standards to calculate the assets subject to operational risk. This method consists first of dividing the business into eight lines. For six of them, the capital requirement is calculated multiplying a “Beta” factor for the average net revenues for the thirty-six months prior to the month being calculated and for the two remaining (Retail and Commercial), the capital requirement is calculated by determining the average net balance for the thirty-six months prior to the month being calculated multiplied for a “Beta” factor and for 3.5. The equivalent assets for operational risk are determined by multiplying the capital requirement by 12.5. Business Indicator Method On November 19, 2020, the CNBV published the methodology of the Business Indicator Method (Método del Indicador de Negocio) for calculating capital requirements for operational risk considering that it is necessary for banks to have a more precise and sensitive method to the risk to which they are exposed in their operation for the purpose of determining their minimum net capital requirements for operational risk, eliminating the other methods currently in force, and at the same time, to maintain the capital framework of the Mexican financial system aligned with the international prudential standards issued by the Basel Committee on Banking Supervision. The Business Indicator Method will enter into force on January 1, 2023.
The minimum capital requirements calculated in accordance with Mexican Banking GAAP for Banco Santander México is as follows: | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | Computable capital: | | | 125,083 | | | 151,458 | | Core capital | | | 138,371 | | | 158,786 | | Supplementary capital | | | 24,847 | | | 27,203 | | Deductible items | | | (47,555) | | | (44,479) | | Subordinated Additional Tier I Capital Notes (see Note 22.c) | | | 9,420 | | | 9,948 | | | | | | | | | | Capital requirements: | | | 61,127 | | | 63,746 | | Market risk | | | 13,988 | | | 15,398 | | Credit risk | | | 42,922 | | | 43,215 | | Operational risk | | | 4,217 | | | 5,133 | | | | | | | | | | Excess of capital requirements | | | 63,956 | | | 87,712 | | Risk-weighted assets | | | 764,093 | | | 796,836 | |
| | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | Computable capital: | | | 168,616 | | | 143,832 | | Core capital | | | 165,626 | | | 165,974 | | Supplementary capital | | | 27,928 | | | 26,827 | | Deductible items | | | (49,547) | | | (62,625) | | Subordinated Additional Tier I Capital Notes (see Note 22.c) | | | 24,609 | | | 13,656 | | | | | | | | | | Capital requirements: | | | 62,564 | | | 59,366 | | Market risk | | | 15,354 | | | 14,945 | | Credit risk | | | 41,416 | | | 38,123 | | Operational risk | | | 5,794 | | | 6,298 | | | | | | | | | | Excess of capital requirements | | | 106,052 | | | 84,466 | | Risk-weighted assets | | | 782,050 | | | 742,079 | |
As of December 31, 20192021 and 2020,2022, in accordance with the capitalization requirements applicable to full service banks, Banco Santander México has the following capitalization ratios, which exceed the minimum legal capital required by the CNBV. The capital ratios included in this table are in accordance to the data published by the CNBV. | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | Net Capital / Required Capital | | | 2.05 | | | 2.38 | | Minimum capital requirements | | | Not applicable | | | Not applicable | | | | | | | | | | Basic Fundamental Capital / Assets subject to Credit, Market and Operating Risk | | | 11.89 | % | | 14.35 | % | Minimum capital requirements | | | 8.20 | % | | 8.20 | % | | | | | | | | | Basic Capital / Assets subject to Credit, Market and Operating Risk | | | 13.12 | % | | 15.59 | % | Minimum capital requirements | | | 9.70 | % | | 9.70 | % | | | | | | | | | Net Capital / Assets subject to Credit Risk | | | 23.31 | % | | 28.04 | % | Minimum capital requirements | | | Not applicable | | | Not applicable | | | | | | | | | | Net Capital / Assets subject to Credit, Market and Operating Risk | | | 16.37 | % | | 19.01 | % | | | | | | | | | Minimum capital requirements | | | 11.70 | % | | 11.70 | % |
| | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | Net Capital / Required Capital | | | 2.70 | | | 2.42 | | Minimum capital requirements | | | Not applicable | | | Not applicable | | | | | | | | | | Basic Fundamental Capital / Assets subject to Credit, Market and Operating Risk | | | 14.84 | % | | 13.93 | % | Minimum capital requirements | | | 8.20 | % | | 8.20 | % | | | | | | | | | Basic Capital / Assets subject to Credit, Market and Operating Risk | | | 17.99 | % | | 15.77 | % | Minimum capital requirements | | | 9.70 | % | | 9.70 | % | | | | | | | | | Net Capital / Assets subject to Credit Risk | | | 32.57 | % | | 30.18 | % | Minimum capital requirements | | | Not applicable | | | Not applicable | | | | | | | | | | Net Capital / Assets subject to Credit, Market and Operating Risk | | | 21.56 | % | | 19.38 | % | | | | | | | | | Minimum capital requirements | | | 11.70 | % | | 11.70 | % |
Resolutions and provisions issued byOn June 18, 2021, the CNBV to address the COVID-19 pandemic
On April 8, 2020, the CNBV issued some resolutions and provisions to face the contingency derived from COVID-19 pandemic. In this sense, the CNBV approved temporary amendments to the General Provisions
Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) regarding capitalization.
The CNBV determined to grant temporary regulatory support measures regarding capitalization, between April 1, 2020 and March 31, 2021, in order to allow banks to use the capital conservation supplement (Capital buffer) without impairing its minimum solvency. The Bank decided not to apply the optional regulatory support measure.
In the Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito), the Early Alerts System (Sistema de Alertas Tempranas) of capitalization considers that banks may use supplements of capital conservation, precisely to face stressed scenarios like the current scenario of contingency caused by the COVID-19 pandemic, as provided in the international prudential standards of the Basel Committee.
Regulatory support measures consist, among others, on the fact that banks will not have to submit the capital conservation plan for CNBV’s approval when using capital conservation supplements, if such supplement is consumed in a maximum of 50%. The CNBV must be informed of the causes that originated the use of the supplement; otherwise, authorization must be requested from the CNBV so that, in justified cases, the banks can increase the amounts disposed of the loans granted to related persons.
Additionally, as another regulatory support measure, the CNBV will published the standard related to the Total Loss-Absorbing Capacity (TLAC) (Capacidad Total para la Absorción de Pérdidas) when it is considered that the economic conditions allowTLAC rule for its implementation by banks. Mexico.
The TLAC standard issued by the Financial Stability Board requires global systemically important banks (G-SIB) to have financial instruments available during resolution to absorb losses and enable them to be recapitalized to continue performing their critical functions while the resolution process is ongoing. The objective is to have an orderly resolution by making debt/equity holders absorb losses (enabling a ‘bail-in’), instead of using public funds (conducting a ‘bailout’). The local implementation considers a capital add-on over the total capital ratio of the maximum of 6.5% of RWAs and 3.75% of the leverage ratio denominator. The TLAC requirement can only be met with capital instruments. This requirement will have a phase-in period, which starts on December 2022 with a 25% of the add-on and will increase 25% each year to reach a 100% of the add-on on December 2025. As of December 31, 2022, the Bank has constituted 25% of the complement required by the TLAC standard issued by the CNBV. 31. Memorandum accounts Memorandum items relate to balances representing rights, obligations and other legal matters that in the future may have an impact on net assets, as well as any other balances needed to reflect all transactions performed by the Bank, although they may not impact on their net assets, including contingent commitments and financial instruments received as collateral in OTC financial derivatives transactions, reverse repurchase agreements and securities loan transactions in which the lender is the Bank. a) Contingent commitments Contingent commitments include those irrevocable commitments that could give rise to the recognition of financial assets. The breakdown is as follows: | | | | | | | Contingent commitments | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 136,405 | | | 157,033 | Guarantees, documentary credits and loan commitments of commercial and public sector loans | | | 79,950 | | | 91,993 | Guarantees, documentary credits and loan commitments of commercial loans (SME) | | | 219 | | | 112 | | | | 216,574 | | | 249,138 |
| | | | | | | Contingent commitments | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 171,094 | | | 205,793 | Guarantees, documentary credits and loan commitments of commercial and public sector loans | | | 91,516 | | | 114,418 | Guarantees, documentary credits and loan commitments of commercial loans (SME) | | | 315 | | | 107 | | | | 262,925 | | | 320,318 |
F-180
As of December 31, 20192021 and 2020,2022, the Bank had recognized provisions for off-balance sheet risk of 1,0751,108 million pesos and 1,2321,539 million pesos, respectively, to cover contingent liabilities arising from available lines of credit cards and non-revolving consumer loans (see Note 24). A significant portion of the guarantees and loan commitments will expire without any payment obligation materializing for the Bank and, therefore, the aggregate balance of these commitments cannot be considered an actual future need for financing or liquidity to be provided by the Bank to third parties. Income from guarantee instruments is recognized under Fee and commission income in the consolidated income statements and is calculated by applying the rate established in the related contract to the nominal amount of the guarantee. As of December 31, 2020,2022, the breakdown of the carrying amount of the contingent commitments by stages is as follows: | | | | | | | | | | | | | | | | | | | | | | | Carrying amount | | Carrying amount | | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | Stage 1 | | | Stage 2 | | | Stage 3 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | Available lines of credit cards and non-revolving consumer loans | | | 154,901 | | | 2,000 | | | 132 | | | 157,033 | | | 204,260 | | | 1,338 | | | 195 | | | 205,793 | Guarantees, documentary credits and loan commitments of commercial and public sector loans | | | 90,915 | | | 815 | | | 263 | | | 91,993 | | | 109,161 | | | 4,822 | | | 435 | | | 114,418 | Guarantees, documentary credits and loan commitments of commercial loans (SME) | | | 93 | | | 11 | | | 8 | | | 112 | | | 107 | | | — | | | — | | | 107 | | | | 245,909 | | | 2,826 | | | 403 | | | 249,138 | | | 313,528 | | | 6,160 | | | 630 | | | 320,318 |
b) Financial instruments received as collateral Financial instruments include those securities received by the Bank in which there is not transfer of the contractual rights or risk and rewards of the financial instruments that could give rise to the recognition of financial assets since the Bank received them to engage in OTC financial derivatives transactions, reverse repurchase agreements and securities loan transactions in which the lender is the Bank. The breakdown is as follows: | | | | | | | Financial instruments received as collateral | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | Debt instruments received in OTC financial derivatives transactions | | | 5,736 | | | 5,483 | Debt instruments received in reverse repurchase agreement transactions | | | 76,592 | | | 59,557 | Equity instruments received in securities loan transactions | | | 14 | | | 137 | | | | 82,342 | | | 65,177 |
| | | | | | | Financial instruments received as collateral | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | Debt instruments received in OTC financial derivatives transactions | | | 4,491 | | | 4,541 | Debt instruments received in reverse repurchase agreement transactions | | | 63,687 | | | 119,398 | Equity instruments received in securities loan transactions | | | 74 | | | 1 | | | | 68,252 | | | 123,940 |
32. Financial derivatives - Nominal amounts and fair values of trading and hedging financial derivatives The breakdown of the fair value and nominal amount of trading financial derivatives asset as of December 31, 20192021 and 20202022 is as follows: | | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | Trading | | | Nominal | | | Fair Value | | | Nominal | | | Fair Value | | | | | | | | | | | | | | | | Futures: | | | | | | | | | | | | | | Foreign Currency Futures | | | — | | | — | | | 1,030 | | | 5 | | Market Index Futures | | | 4,144 | | | — | | | 9 | | | — | | | | | | | | | | | | | | | | Forwards: | | | | | | | | | | | | | | Foreign Currency Forwards | | | 209,085 | | | 8,769 | | | 171,450 | | | 9,293 | | Foreign Exchange (Spot) | | | 18,630 | | | 32 | | | 40,944 | | | 92 | | Equity Forwards | | | 341 | | | — | | | 2,270 | | | 48 | | | | | | | | | | | | | | | | Options: | | | | | | | | | | | | | | Foreign Currency Options | | | 50,940 | | | 1,052 | | | 72,892 | | | 3,879 | | Interest Rate Options | | | 111,940 | | | 421 | | | 54,471 | | | 232 | | Market Index Options | | | 1,828 | | | 212 | | | 271 | | | 43 | | Equity Options | | | 43 | | | — | | | 649 | | | 72 | | | | | | | | | | | | | | | | Swaps: | | | | | | | | | | | | | | IRS | | | 3,353,662 | | | 80,078 | | | 3,596,532 | | | 196,170 | | Equity Swaps | | | 628 | | | 10 | | | — | | | — | | CCS | | | 442,402 | | | 61,173 | | | 472,918 | | | 86,337 | | Total Trading | | | 4,193,643 | | | 151,747 | | | 4,413,436 | | | 296,171 | |
| | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | Trading | | | Nominal | | | Fair Value | | | Nominal | | | Fair Value | | | | | | | | | | | | | | | | Futures: | | | | | | | | | | | | | | Foreign Currency Futures | | | 12,453 | | | — | | | 48,013 | | | — | | Market Index Futures | | | 72 | | | — | | | — | | | — | | | | | | | | | | | | | | | | Forwards: | | | | | | | | | | | | | | Foreign Currency Forwards | | | 261,701 | | | 5,042 | | | 187,753 | | | 6,723 | | Foreign Exchange (Spot) | | | 30,428 | | | 88 | | | 21,769 | | | 215 | | Equity Forwards | | | — | | | — | | | — | | | — | | | | | | | | | | | | | | | | Options: | | | | | | | | | | | | | | Foreign Currency Options | | | 88,639 | | | 1,874 | | | 117,173 | | | 2,321 | | Interest Rate Options | | | 53,370 | | | 712 | | | 66,342 | | | 1,277 | | Market Index Options | | | 281 | | | 45 | | | 55 | | | 12 | | Equity Options | | | 775 | | | 85 | | | 2,379 | | | 162 | | | | | | | | | | | | | | | | Swaps: | | | | | | | | | | | | | | IRS | | | 3,577,417 | | | 94,895 | | | 3,863,421 | | | 158,553 | | CCS | | | 486,767 | | | 76,649 | | | 523,287 | | | 59,553 | | Total Trading | | | 4,511,903 | | | 179,390 | | | 4,830,192 | | | 228,816 | |
As of December 31, 20192021 and 2020, 151,7472022, 179,390 million pesos and 296,171228,816 million pesos (assets) are OTC financial derivatives of the total amount of the trading financial derivatives asset, respectively. The breakdown of the fair value and nominal amount of hedging financial derivatives asset as of December 31, 20192021 and 20202022 is as follows: | | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | Hedging | | | Nominal | | | Fair Value | | | Nominal | | | Fair Value | | | | | | | | | | | | | | | | Cash flow hedge: | | | | | | | | | | | | | | CCS | | | 11,177 | | | 3,843 | | | 10,824 | | | 4,282 | | Foreign Currency Forwards | | | 59,417 | | | 4,488 | | | 36,144 | | | 4,013 | | | | | | | | | | | | | | | | Fair value hedge: | | | | | | | | | | | | | | IRS | | | 53,882 | | | 719 | | | 1,000 | | | 11 | | CCS | | | 3,868 | | | 206 | | | — | | | — | | Total Hedging | | | 128,344 | | | 9,256 | | | 47,968 | | | 8,306 | | Total Financial Derivatives Asset | | | 4,321,987 | | | 161,003 | | | 4,461,404 | | | 304,477 | |
| | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | Hedging | | | Nominal | | | Fair Value | | | Nominal | | | Fair Value | | | | | | | | | | | | | | | | Cash flow hedge: | | | | | | | | | | | | | | CCS | | | 11,125 | | | 4,547 | | | 5,553 | | | 189 | | Foreign Currency Forwards | | | 57,669 | | | 5,233 | | | 41,079 | | | 5,069 | | | | | | | | | | | | | | | | Fair value hedge: | | | | | | | | | | | | | | IRS | | | 47,047 | | | 1,454 | | | 66,503 | | | 3,680 | | CCS | | | 244 | | | 14 | | | 13,067 | | | 1,243 | | Total Hedging | | | 116,085 | | | 11,248 | | | 126,202 | | �� | 10,181 | | Total Financial Derivatives Asset | | | 4,627,988 | | | 190,638 | | | 4,956,394 | | | 238,997 | |
F-182
The breakdown of the fair value and nominal amount of trading financial derivatives liability as of December 31, 20192021 and 20202022 is as follows: | | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | Trading | | | Nominal | | | Fair Value | | | Nominal | | | Fair Value | | | | | | | | | | | | | | | | Futures: | | | | | | | | | | | | | | Foreign Currency Futures | | | 14,202 | | | — | | | 4,614 | | | — | | Market Index Futures | | | 79 | | | — | | | 139 | | | — | | | | | | | | | | | | | | | | Forwards: | | | | | | | | | | | | | | Foreign Currency Forwards | | | 199,493 | | | 6,551 | | | 175,827 | | | 7,991 | | Foreign Exchange (Spot) | | | 36,973 | | | 73 | | | 29,930 | | | 72 | | Market Index Forwards | | | 651 | | | 6 | | | 2,292 | | | 33 | | | | | | | | | | | | | | | | Options: | | | | | | | | | | | | | | Foreign Currency Options | | | 57,808 | | | 1,606 | | | 54,923 | | | 2,766 | | Interest Rate Options | | | 140,813 | | | 474 | | | 93,248 | | | 306 | | Market Index Options | | | 1,122 | | | 201 | | | 697 | | | 582 | | Equity Options | | | — | | | — | | | 868 | | | 65 | | | | | | | | | | | | | | | | Swaps: | | | | | | | | | | | | | | IRS | | | 3,296,209 | | | 76,165 | | | 3,597,275 | | | 189,535 | | Equity Swaps | | | — | | | 12 | | | 704 | | | 184 | | CCS | | | 385,855 | | | 59,393 | | | 451,191 | | | 84,577 | | Total Trading | | | 4,133,205 | | | 144,481 | | | 4,411,708 | | | 286,111 | |
| | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | Trading | | | Nominal | | | Fair Value | | | Nominal | | | Fair Value | | | | | | | | | | | | | | | | Futures: | | | | | | | | | | | | | | Foreign Currency Futures | | | 10,827 | | | — | | | 15,212 | | | 12 | | Market Index Futures | | | 612 | | | 1 | | | 127 | | | — | | | | | | | | | | | | | | | | Forwards: | | | | | | | | | | | | | | Foreign Currency Forwards | | | 214,999 | | | 3,389 | | | 200,965 | | | 4,985 | | Foreign Exchange (Spot) | | | 33,031 | | | 102 | | | 39,033 | | | 123 | | | | | | | | | | | | | | | | Options: | | | | | | | | | | | | | | Foreign Currency Options | | | 70,823 | | | 2,064 | | | 78,285 | | | 2,278 | | Interest Rate Options | | | 78,509 | | | 915 | | | 104,644 | | | 1,921 | | Market Index Options | | | 1,904 | | | 1,422 | | | 1,736 | | | 1,567 | | Equity Options | | | 1,934 | | | 209 | | | 4,228 | | | 177 | | | | | | | | | | | | | | | | Swaps: | | | | | | | | | | | | | | IRS | | | 3,724,129 | | | 93,600 | | | 3,843,533 | | | 164,277 | | Equity Swaps | | | 859 | | | 342 | | | 450 | | | 473 | | CCS | | | 417,366 | | | 74,634 | | | 480,136 | | | 55,375 | | Total Trading | | | 4,554,993 | | | 176,678 | | | 4,768,349 | | | 231,188 | |
As of December 31, 20192021 and 2020, 144,4812022, 176,678 million pesos and 286,111231,188 million pesos (liabilities), respectively are OTC financial derivatives of the total amount of the trading portfolio. The breakdown of the fair value and nominal amount of hedging financial derivatives liability as of December 31, 20192021 and 20202022 is as follows: | | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | Hedging | | | Nominal | | | Fair Value | | | Nominal | | | Fair Value | | | | | | | | | | | | | | | | Cash flow hedge: | | | | | | | | | | | | | | IRS | | | 11,311 | | | 118 | | | 11,311 | | | 365 | | CCS | | | 10,704 | | | 1,690 | | | 4,958 | | | 1,540 | | Foreign Currency Forwards | | | 10,698 | | | 409 | | | 18,622 | | | 569 | | | | | | | | | | | | | | | | Fair value hedge: | | | | | | | | | | | | | | IRS | | | 3,600 | | | 246 | | | 49,380 | | | 4,361 | | CCS | | | 31,874 | | | 5,060 | | | 34,922 | | | 12,243 | | Total Hedging | | | 68,187 | | | 7,523 | | | 119,193 | | | 19,078 | | Total Financial Derivatives Liability | | | 4,201,392 | | | 152,004 | | | 4,530,901 | | | 305,189 | |
| | | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | Hedging | | | Nominal | | | Fair Value | | | Nominal | | | Fair Value | | | | | | | | | | | | | | | | Cash flow hedge: | | | | | | | | | | | | | | IRS | | | 7,311 | | | 42 | | | — | | | — | | CCS | | | 2,704 | | | 864 | | | 3,340 | | | 371 | | Foreign Currency Forwards | | | 7,289 | | | 238 | | | 12,279 | | | 885 | | | | | | | | | | | | | | | | Fair value hedge: | | | | ��� | | | | | | | | | | IRS | | | 1,867 | | | 96 | | | 62,029 | | | 1,109 | | CCS | | | 28,715 | | | 6,922 | | | 8,031 | | | 2,096 | | Total Hedging | | | 47,886 | | | 8,162 | | | 85,679 | | | 4,461 | | Total Financial Derivatives Liability | | | 4,602,879 | | | 184,840 | | | 4,854,028 | | | 235,649 | |
F-183
As of December 31, 20192021 and 2020,2022, the collateral provided to engage in financial derivatives transactions in organized markets is as follows: | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | | Collateral provided: | | | | | | | | | | Of which: | | | | | | | | | | Mercado Mexicano de Derivados, S.A. de C.V. | | | Cash | | | 3,865 | | | 3,113 | Chicago Mercantile Exchange | | | Cash | | | 1,286 | | | 1,009 | Foreign financial institutions | | | Cash | | | 2 | | | 1 | | | | | | | 5,153 | | | 4,123 |
| | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | | Collateral provided: | | | | | | | | | | Of which: | | | | | | | | | | Mercado Mexicano de Derivados, S.A. de C.V. | | | Cash | | | 4,326 | | | 5,946 | Chicago Mercantile Exchange | | | Cash | | | 1,934 | | | 431 | Foreign financial institutions | | | Cash | | | 1 | | | 153 | | | | | | | 6,261 | | | 6,530 |
Deposits of collateral back up positions operated on the Mexican Derivatives Exchange Market (Mercado Mexicano de Derivados), such as futures based on the IPC,Indice de Precios y Cotizaciones (IPC) of Mexican Stock Exchange, USD futures, listed option futures, positions operated on the Chicago Mercantile Exchange such as Standard & Poor’s futures, US Treasury Notes futures and equity options, and positions operated through foreign financial institutions. The guarantees and/or collateral delivered for the OTC financial derivatives transactions as of December 31, 20192021 and 20202022 are as follows: | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | | Financial assets at amortized cost - Loans and advances to credit institutions: | | | | | | | | | | Of which (Note 7): | | | | | | | | | | Mexican financial institutions | | | Cash | | | 7,536 | | | 15,738 | Foreign financial institutions | | | Cash | | | 6,764 | | | 12,216 | | | | | | | 14,300 | | | 27,954 | Financial assets at fair value through profit or loss - Debt instruments: | | | | | | | | | | Of which (Note 8): | | | | | | | | | | Mexican financial institutions | | | Bonds | | | 3,121 | | | 4,410 | Foreign financial institutions (*) | | | Bonds | | | 1,351 | | | 896 | | | | | | | 4,472 | | | 5,306 |
| | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | | Financial assets at amortized cost - Loans and advances to credit institutions: | | | | | | | | | | Of which (Note 7): | | | | | | | | | | Mexican financial institutions | | | Cash | | | 7,163 | | | 11,697 | Foreign financial institutions | | | Cash | | | 6,071 | | | 2,888 | | | | | | | 13,234 | | | 14,585 | | | | | | | | | | | Financial assets at amortized cost - Loans and advances to customers: | | | | | | | | | | Of which (Note 11): | | | | | | | | | | Mexican institutions | | | Cash | | | — | | | 1,091 | | | | | | | — | | | 1,091 | | | | | | | | | | | Financial assets at fair value through profit or loss - Debt instruments: | | | | | | | | | | Of which (Note 8): | | | | | | | | | | Mexican financial institutions | | | Bonds | | | 3,443 | | | 4,906 | Foreign financial institutions | | | Bonds | | | 2,932 | | | 2,171 | | | | | | | 6,375 | | | 7,077 |
(*) As of December 31, 2019, and 2020, includes 1,318 million pesos and 813 million pesos, respectively, of debt instruments received as collateral (registered in memorandum accounts), which were delivered in OTC financial derivatives transactions as collateral.
The guarantees and/or collateral received for the OTC financial derivatives transactions as of December 31, 20192021 and 20202022 are as follows: | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | | Deposits from credit institutions and Customer deposits: | | | | | | | | | | Of which (Notes 19 and 20): | | | | | | | | | | Mexican financial institutions | | | Cash | | | 5,174 | | | 21,649 | Foreign financial institutions | | | Cash | | | 11,527 | | | 1,403 | Other | | | Cash | | | 58 | | | — | | | | | | | 16,759 | | | 23,052 |
| | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | | Deposits from credit institutions and Customer deposits: | | | | | | | | | | Of which (Notes 19 and 20): | | | | | | | | | | Mexican financial institutions | | | Cash | | | 9,325 | | | 5,559 | Foreign financial institutions | | | Cash | | | 17,594 | | | 21,302 | | | | | | | 26,919 | | | 26,861 |
F-184
| | | | | | | | | | | | | | | | 12/31/2021 | | | 12/31/2022 | | | | | | | | | | | Memorandum accounts: | | | | | | | | | | Of which (Note 31): | | | | | | | | | | Mexican financial institutions | | | Bonds | | | 4,491 | | | 4,541 | | | | | | | 4,491 | | | 4,541 |
Table of Contents
| | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2020 | | | | | | | | | | | Memorandum accounts: | | | | | | | | | | Of which (Note 31): | | | | | | | | | | Mexican financial institutions | | | Bonds | | | 5,736 | | | 5,483 | | | | | | | 5,736 | | | 5,483 |
Upon executing transactions with OTC financial derivatives, the Bank agrees to deliver and/or receive collateral to cover any exposure to market risk and the credit risk of such transactions. Such collateral is contractually agreed to with each of the counterparties. Currently, debt instruments, mainly government bonds, are posted as collateral for transactions with domestic financial entities. Cash deposits are used for transactions with foreign financial entities and institutional customers. The nominal and/or contractual amounts of the financial derivatives contracts traded by the Bank do not reflect the actual risk assumed by the Bank since the net position in these financial instruments is the result of offsetting and/or combining them. The net position is used by the Bank to hedge interest rates, underlying asset prices or foreign currency risk and to assume directional exposure to risk factors limited by the Bank’s risk appetite. The results of these financial instruments are recognized in Gains/(losses) on financial assets and liabilities (net) in the consolidated income statement. If their purpose is to hedge other exposures, they increase or offset, as appropriate, the gains or losses on the hedged investments (see Note 12). The Bank manages the credit risk exposure of these contracts through setting credit lines, establishing netting arrangements with its main counterparties and by receiving assets as collateral (see Note 2.f). The cumulative credit risk exposure is measured in terms of Equivalent Credit Risk (hereinafter, “ECR”). ECR is composed of the current exposureCurrent Exposure of the contract (at fair value in the case of financial derivatives) and the Potential Future Exposure (hereinafter, “PFE”) which is defined as the maximum expected credit risk exposure over a specified period of time calculated at a 97.5% level of confidence and which expresses its potential future exposure. This metric is used internally for management purposes. ECR by Profiles Methodology introduces the concept of Exposure Profile per deal, where risk exposure may vary depending on the time-band considered. There is not a unique exposure figure per deal. However, many exposures figure as time-bands are affected and each time-band exposure equals the maximum exposure within the time-band. Deal risk aggregation per counterparty and per time-band requires aggregation of a Potential Future Exposure for each of the time-bands and considering the netting agreement for the Current Exposure and if applicable, collateral mitigation; so, there is an aggregated net exposure per counterparty as time-bands are impacted. For financial derivatives, where ECR is equal to the Current Exposure plus the nominal amount multiplied by the Risk Factor,risk factor, the Profiles Methodology implies that PFE figure is not unique but is calculated for each of the time-bands. The Counterparty Credit Risk area compares, on a monthly basis, the nominal amounts used to calculate the PFE against the nominal amounts recognized in the accounting records and compares the Current Exposure amounts used for the Current Exposure of the ECR against the Current Exposure amounts also recognized in the accounting records.
As of December 31, 20192021 and 2020,2022, the cumulative net credit risk exposure of the Bank was 390,32432,803 million pesos and 45,37242,765 million pesos, respectively. The netCounterparty credit risk exposure comprises the total counterparty credit risk and issuer risk (which includes financial derivatives, repurchase agreements and debt securities), less any received assets assecurities lending. Received collateral for mitigating these risks.is included with risk mitigation purposes to estimate exposure. 33. Interest income calculated using the effective interest method Interest income in the consolidated income statement comprises the interest accrued in the year on all financial assets with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value through other comprehensive income, and the adjustment to interest income as a result of hedge accounting. The breakdown of the main interest income calculated using the effective interest method items earned in 2018, 20192020, 2021 and 20202022 is as follows: | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Cash and balances with the Central Bank | | | 2,361 | | | 2,456 | | | 1,951 | Loans and advances to credit institutions | | | 2,178 | | | 2,839 | | | 412 | Loans and advances to customers | | | 81,976 | | | 89,894 | | | 84,290 | Debt instruments | | | 10,039 | | | 9,925 | | | 14,643 | Hedging financial derivatives | | | 2,858 | | | 3,541 | | | 2,432 | Other interest income | | | 125 | | | 191 | | | 249 | | | | 99,537 | | | 108,846 | | | 103,977 |
| | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Cash and balances with the Central Bank | | | 1,951 | | | 1,471 | | | 2,587 | Loans and advances to credit institutions | | | 412 | | | 1,714 | | | 1,523 | Loans and advances to customers | | | 84,290 | | | 74,695 | | | 93,594 | Debt instruments | | | 14,643 | | | 15,472 | | | 19,788 | Hedging financial derivatives | | | 2,432 | | | 340 | | | 5,370 | Other interest income | | | 249 | | | 353 | | | 1,234 | | | | 103,977 | | | 94,045 | | | 124,096 |
34. Other Interestinterest and similar income from financial assets at fair value through profit or loss InterestOther interest and similar income from financial assets at fair value through profit or loss in the consolidated income statement comprises the interest accrued in the year on financial assets at fair value through profit or loss with an implicit or explicit return, calculated by applying the effective interest method.
The breakdown of the main interest income from financial assets at fair value through profit or loss items earned in 20192020,2021 and 20202022 is as follows: | | | | | | | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions | | | 5,981 | | | 6,306 | | | 2,997 | | | 2,997 | | | 1,543 | | | 8,002 | Loans and advances to customers | | | 518 | | | 1,742 | | | 804 | | | 804 | | | 507 | | | 785 | Debt instruments | | | 7,550 | | | 7,336 | | | 8,207 | | | 8,207 | | | 7,017 | | | 6,113 | | | | 14,049 | | | 15,384 | | | 12,008 | | | 12,008 | | | 9,067 | | | 14,900 |
35. Interest expensesexpense and similar charges Interest expensesexpense and similar charges in the consolidated income statement include the interest accrued during the year on all financial liabilities with an implicit or explicit return, calculated by applying the effective interest method, irrespective of measurement at fair value, the adjustment to interest expense as a result of hedge accounting and the net interest cost attributable to pension plans.
The breakdown of the main items of interest expensesexpense and similar charges accrued in 2018, 20192020, 2021 and 20202022 is as follows: | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Deposits from credit institutions | | | 7,420 | | | 9,041 | | | 12,400 | Customer deposits | | | 31,913 | | | 35,036 | | | 28,235 | Marketable debt securities | | | 4,244 | | | 5,398 | | | 5,756 | Subordinated liabilities | | | 1,610 | | | 1,597 | | | 1,767 | Hedging financial derivatives | | | 108 | | | 222 | | | 193 | Other interest expenses | | | 6,294 | | | 6,780 | | | 1,824 | | | | 51,589 | | | 58,074 | | | 50,175 |
| | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Deposits from credit institutions | | | 12,400 | | | 10,967 | | | 19,373 | Customer deposits | | | 28,235 | | | 19,224 | | | 32,228 | Marketable debt securities | | | 5,756 | | | 5,308 | | | 7,632 | Subordinated liabilities | | | 1,767 | | | 1,668 | | | 1,646 | Hedging financial derivatives | | | 193 | | | 299 | | | 99 | Other interest expense | | | 1,824 | | | 2,214 | | | 2,906 | | | | 50,175 | | | 39,680 | | | 63,884 |
36. Dividend income Dividend income includes the dividends and payments on equity instruments out of profits generated by investees after the acquisition of the equity interest. The breakdown of Dividend income is as follows: | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Equity instruments classified as: | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through profit or loss | | | 33 | | | 44 | | | 40 | Of which: | | | | | | | | | | NAFTRAC (Exchange-traded fund or ETF) | | | 18 | | | 36 | | | 36 | Grupo Cementos de Chihuahua, S.A.B. de C.V. | | | 11 | | | 7 | | | 3 | Fomento Económico Mexicano, S.A.B. de C.V. | | | — | | | — | | | 1 | América Móvil, S.A.B, de C.V. | | | 1 | | | — | | | — | Grupo México, S.A.B. de C.V. | | | 1 | | | — | | | — | Wal-Mart de México, S.A.B. de C.V. | | | 1 | | | 1 | | | — | Others | | | 1 | | | — | | | — | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 177 | | | 191 | | | 206 | Of which: | | | | | | | | | | Controladora Prosa, S.A. de C.V. | | | 50 | | | 54 | | | 73 | Trans Unión de México, S.A. | | | 88 | | | 93 | | | 88 | Bolsa Mexicana de Valores, S.A.B. de C.V. | | | 21 | | | 25 | | | 25 | Dun & Bradstreet de México, S.A. de C.V. | | | 17 | | | 18 | | | 20 | Others | | | 1 | | | 1 | | | — | | | | 210 | | | 235 | | | 246 |
| | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Equity instruments classified as: | | | | | | | | | | | | | | | | | | | | Financial assets at fair value through profit or loss | | | 40 | | | 28 | | | 13 | Of which: | | | | | | | | | | NAFTRAC (Exchange-traded fund or ETF) | | | 36 | | | 9 | | | 5 | Grupo México, S.A.B. de C.V. | | | — | | | — | | | 8 | Grupo Cementos de Chihuahua, S.A.B. de C.V. | | | 3 | | | 1 | | | — | Fomento Económico Mexicano, S.A.B. de C.V. | | | 1 | | | — | | | — | Wal-Mart de México, S.A.B. de C.V. | | | — | | | 1 | | | — | Organización Soriana, S.A.B. de C.V. | | | — | | | 17 | | | — | | | | | | | | | | | Financial assets at fair value through other comprehensive income | | | 206 | | | 199 | | | 173 | Of which: | | | | | | | | | | Controladora Prosa, S.A. de C.V. | | | 73 | | | 64 | | | — | Trans Unión de México, S.A. | | | 88 | | | 88 | | | 126 | Bolsa Mexicana de Valores, S.A.B. de C.V. | | | 25 | | | 29 | | | 31 | Dun & Bradstreet de México, S.A. de C.V. | | | 20 | | | 18 | | | 16 | Others | | | — | | | — | | | — | | | | 246 | | | 227 | | | 186 |
37. Fee and commission income Fee and commission income comprises the amount of all fees and commissions accruing in favor of the Bank during the year, except those that form part of the effective interest rate on financial instruments.
The breakdown of Fee and commission income is as follows: | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Collection and payment services: | | | | | | | | | | Service charges on deposit accounts | | | 2,588 | | | 2,593 | | | 3,012 | Credit and debit cards | | | 7,667 | | | 8,379 | | | 9,892 | Checks and others | | | 181 | | | 172 | | | 157 | | | | 10,436 | | | 11,144 | | | 13,061 | Marketing of non-banking financial products: | | | | | | | | | | Investment funds management | | | 1,611 | | | 1,747 | | | 1,900 | Capital markets and securities activities | | | 514 | | | 523 | | | 634 | Collection and payment services | | | 2,074 | | | 2,206 | | | 2,350 | Insurance | | | 5,300 | | | 5,508 | | | 6,203 | Financial advisory services | | | 1,179 | | | 1,307 | | | 1,415 | | | | 10,678 | | | 11,291 | | | 12,502 | Securities services: | | | | | | | | | | Administration and custody | | | 461 | | | 459 | | | 394 | | | | 461 | | | 459 | | | 394 | Other: | | | | | | | | | | Foreign currency transactions | | | 1,380 | | | 1,510 | | | 1,539 | Other fees and commissions | | | 801 | | | 951 | | | 999 | | | | 2,181 | | | 2,461 | | | 2,538 | | | | 23,756 | | | 25,355 | | | 28,495 |
| | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Collection and payment services: | | | | | | | | | | Service charges on deposit accounts | | | 1,217 | | | 1,438 | | | 2,588 | Credit and debit cards | | | 7,398 | | | 8,757 | | | 7,667 | Checks and others | | | 240 | | | 243 | | | 181 | | | | 8,855 | | | 10,438 | | | 10,436 | Marketing of non-banking financial products: | | | | | | | | | | Investment funds management | | | 1,569 | | | 1,568 | | | 1,611 | Capital markets and securities activities | | | 738 | | | 558 | | | 514 | Collection and payment services | | | 2,832 | | | 2,923 | | | 2,074 | Insurance | | | 4,575 | | | 5,038 | | | 5,300 | Financial advisory services | | | 1,212 | | | 1,207 | | | 1,179 | | | | 10,926 | | | 11,294 | | | 10,678 | Securities services: | | | | | | | | | | Administration and custody | | | 368 | | | 347 | | | 461 | | | | 368 | | | 347 | | | 461 | Other: | | | | | | | | | | Foreign currency transactions | | | 1,255 | | | 1,287 | | | 1,380 | Other fees and commissions | | | 892 | | | 952 | | | 801 | | | | 2,147 | | | 2,239 | | | 2,181 | | | | 22,296 | | | 24,318 | | | 23,756 |
F-169 38. Fee and commission expenses Fee and commission expenses comprises the amount of all fees and commissions paid or payable by the Bank in the year, except those that form part of the effective interest rate on financial instruments. The breakdown of Fee and commission expenses is as follows: | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Credit and debit cards | | | 3,680 | | | 4,095 | | | 2,741 | Checks and others | | | 26 | | | 31 | | | 43 | Collections and transactional services | | | 287 | | | 312 | | | 291 | Fund management | ��� | | 1 | | | 1 | | | 1 | Capital markets and securities activities | | | 189 | | | 238 | | | 173 | Financial advisory services | | | 13 | | | 6 | | | 5 | Correspondent services | | | 614 | | | 723 | | | 791 | Other fees and commissions | | | 1,764 | | | 2,488 | | | 2,688 | | | | 6,574 | | | 7,894 | | | 6,733 |
| | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Credit and debit cards | | | 2,741 | | | 3,938 | | | 4,964 | Checks and others | | | 43 | | | 48 | | | 68 | Collections and transactional services | | | 291 | | | 305 | | | 254 | Fund management | | | 1 | | | 1 | | | 1 | Capital markets and securities activities | | | 173 | | | 202 | | | 296 | Financial advisory services | | | 5 | | | 6 | | | 6 | Correspondent services | | | 791 | | | 802 | | | 674 | Other fees and commissions | | | 2,688 | | | 2,847 | | | 3,000 | | | | 6,733 | | | 8,149 | | | 9,263 |
F-188
39. Gains/(losses) on financial assets and liabilities (net) Gains/(losses) on financial assets and liabilities (net) include the amount of the valuation adjustments of financial instruments, except those attributable to interest accrued as a result of application of the effective interest method, impairment losses and the realized gains or losses obtained from the sale and purchase thereof. The breakdown of Gains/(losses) on financial assets and liabilities (net) by type of instrument is as follows: | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Financial instruments at fair value through profit or loss | | | 1,687 | | | 2,709 | | | 5,662 | | Of which: | | | | | | | | | | | Debt instruments | | | 166 | | | 260 | | | 1,221 | | Equity instruments | | | 35 | | | 71 | | | (161) | | Derivatives | | | 1,482 | | | 2,459 | | | 4,458 | | Others | | | 4 | | | (81) | | | 144 | | Recognized profit from sale of financial assets at fair value through other comprehensive income | | | (69) | | | 85 | | | 779 | | Hedging derivatives | | | (134) | | | 60 | | | (457) | | Of which: | | | | | | | | | | | Fair value hedge - hedged items (Note 12) | | | (606) | | | 731 | | | 6,427 | | Fair value hedge - hedging derivative instruments (Note 12) | | | 474 | | | (667) | | | (6,884) | | Cash flow hedge inefficiency (Note 12) | | | (2) | | | (4) | | | — | | | | | 1,484 | | | 2,854 | | | 5,984 | |
| | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Financial instruments at fair value through profit or loss | | | 5,662 | | | 4,640 | | | 589 | | Of which: | | | | | | | | | | | Debt instruments | | | 1,221 | | | 119 | | | (5,613) | | Equity instruments | | | (161) | | | 398 | | | 289 | | Derivatives | | | 4,458 | | | 4,096 | | | 6,021 | | Others | | | 144 | | | 27 | | | (108) | | Recognized profit from sale of financial assets at fair value through other comprehensive income | | | 779 | | | 781 | | | 113 | | Hedging derivatives | | | (457) | | | (538) | | | 322 | | Of which: | | | | | | | | | | | Fair value hedge - hedged items (Note 12) | | | 6,427 | | | (9,278) | | | (4,903) | | Fair value hedge - hedging derivative instruments (Note 12) | | | (6,884) | | | 8,746 | | | 5,225 | | Cash flow hedge inefficiency (Note 12) | | | — | | | (6) | | | — | | | | | 5,984 | | | 4,883 | | | 1,024 | |
40. Exchange differences (net) Exchange differences (net) shows the gains or losses arising on the translation of monetary items in foreign currency to the functional currency as a result of changes in foreign exchange rates. 41. Other operating income and other operating expenses Other operating income and other operating expenses in the consolidated income statement include: | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | Other operating income: | | | | | | | | | | | Other operating income | | | 748 | | | 1,553 | | | 1,651 | | | | | 748 | | | 1,553 | | | 1,651 | | Other operating expenses: | | | | | | | | | | | IPAB fund contribution | | | (3,134) | | | (3,353) | | | (3,859) | | Other operating expenses | | | (1,259) | | | (1,792) | | | (1,354) | | | | | (4,393) | | | (5,145) | | | (5,213) | |
| | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | Other operating income: | | | | | | | | | | | Other operating income | | | 1,651 | | | 1,740 | | | 810 | | | | | 1,651 | | | 1,740 | | | 810 | | Other operating expenses: | | | | | | | | | | | IPAB fund contribution | | | (3,859) | | | (3,801) | | | (3,981) | | Other operating expenses | | | (1,354) | | | (1,405) | | | (1,305) | | | | | (5,213) | | | (5,206) | | | (5,286) | |
On January 19, 1999, IPAB was created in order to establish a bank savings protection system in favor of depositors that perform guaranteed banking transactions, and to regulate financial support granted to full service banking institutions in order to protect the interests of depositors. IPAB’s resources come from the mandatory contributions paid by financial entities, according to the risk to which they are exposed. Such contributions are calculated based on the capitalization level of each financial
group and other indicators set forth in IPAB’s bylaws issued by its board of directors. These contributions must be equivalent to one-twelfthone-twelfth of four-thousandths of the monthly average of the daily balances of funding activities of the applicable month. 42. Personnel expenses a) Breakdown The breakdown of Personnel expenses is as follows: | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Wages and salaries | | | 7,274 | | | 7,740 | | | 7,838 | Social security costs | | | 1,283 | | | 1,443 | | | 1,494 | Service expense related to defined contribution pension plan (Note 24) | | | 373 | | | 410 | | | 488 | Service expense related to defined benefit pension plan | | | 157 | | | 147 | | | 194 | Share-based payments | | | 161 | | | 226 | | | 226 | Bonus and benefits granted to employees | | | 3,691 | | | 4,017 | | | 3,052 | Other staff costs | | | 1,415 | | | 1,445 | | | 1,584 | | | | 14,354 | | | 15,428 | | | 14,876 |
| | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Wages and salaries | | | 7,838 | | | 8,307 | | | 9,164 | Social security costs | | | 1,494 | | | 1,703 | | | 2,010 | Service expense related to defined contribution pension plan (Note 24) | | | 488 | | | 483 | | | 555 | Service expense related to defined benefit pension plan | | | 194 | | | 260 | | | 221 | Share-based payments | | | 226 | | | 54 | | | 305 | Bonus and benefits granted to employees | | | 3,052 | | | 4,111 | | | 4,983 | Other staff costs | | | 1,584 | | | 1,567 | | | 1,677 | | | | 14,876 | | | 16,485 | | | 18,915 |
b) Long-term incentive plan 2015Share-based payments Since September 2016,Banco Santander (Spain) approved an internal policy, among the main benefits are the following:
| - | a portion of the variable annual compensation of eligible employees is deferred for a period between four to five years, with a fourth or fifth part granted each year, |
| - | deferred and non-deferred portions are payables with shares and cash in equal parts, |
| - | once the shares have been delivered to the employees, they must keep them for at least one year. |
Prior to the 2021 exchange offer mentioned in Note 3, the Bank beganissued its own shares to participatecompensate eligible employees for the portion payable in a corporate share-based variable compensation plan denominated “Long-term incentive plan 2015” applicable to the membersshares and classified this portion of the Identified Staff. This plan providedas an equity-settled plan. As a variable compensation linked to the growthconsequence of the earnings per share ratio and2021 exchange offer, the share-based payment plan was modified. The modification requires the Bank to acquire Banco Santander’s (Spain) shares to compensate eligible employees; accordingly, the share-based payment portion of the returnplan is now classified as a cash-settled plan. The Board of Directors is responsible for determining the specific amount of deferred compensation to be paid each year. If the objectives are achieved on tangibleeach anniversary, the beneficiaries will receive cash and shares of Banco Santander (Spain) in fourths or fifths, as applicable, within thirty days after the first, second, third and, if applicable, fourth and fifth anniversary. At the end of the 2021 exchange offer, 264 million pesos were reclassified from Accumulated reserves within Shareholders’ equity to Other liabilities in the consolidated balance sheet. As of December 31, 2022, the plan has 2,004,800 shares committed of Banco Santander (Spain). The Long-term incentive plan 2015 will be settled through own equity instruments. The fair value of the Long-term incentive plan 2015 amounted to 86 million pesos.
During 2018, 20192021 and 2020,2022, the Bank recognized 16 million pesos, 5 million pesos and 6 million pesos, respectively,compensation expense relating to the share-based payment portion of the plan in the consolidated income statement with respect to this plan.for an amount of 54 million pesos and 305 million pesos, respectively. c) Bonus payment policies As a result of an internal policy of Banco Santander (Spain), a portion of the annual variable remuneration plan for the Identified Staff is deferred for a period of three or five years, with one-thirdone-third or one-fifthone-fifth vesting each year. Both the deferred and non-deferred portions are paid equally in cash and in shares of Banco Santander México for the corresponding payment periods. Once delivered, beneficiaries are obligated to keep the shares for a one-year period. Consistent with the share-based payments plan above, subsequent to the 2021 exchange offer mentioned in Note 3, the Bank is required to acquire Banco Santander’s (Spain) shares to compensate the Identified Staff. In 2018, 20192020, 2021 and 2020,2022, the Bank recognized the bonus of the Identified Staff in the consolidated income statement for an amount of 184294 million pesos, 226448 million pesos and 294862 million pesos, respectively. The bonus of the Identified Staff for financial years 2018, 20192020, 2021 and 20202022 are paid according to the following percentages, depending on the time of payment and on the group to which the beneficiary belongs
(the (the “Immediate Payment Percentage” to identify the portion for which payment is not deferred and the “Deferred Percentage” to identify the portion for which payment is deferred):
| | | | | | | | | | Beneficiaries | | | Immediate Payment | | | | | | | (Millions of Euros) | | | Percentage | | | Deferred Percentage | | | Deferred period | | | | | | | | | | | Members of the Identified Staff with total variable remuneration ≥ 2.7 | | | 40 | % | | 60 | % | | 5 years | Members of the Identified Staff with total variable remuneration ≥ 1.7 (< 2.7) | | | 50 | % | | 50 | % | | 5 years | Other beneficiaries | | | 60 | % | | 40 | % | | 3 years |
| | | | | | | | | | Beneficiaries | | | Immediate Payment | | | | | | | (Millions of Euros) | | | Percentage | | | Deferred Percentage | | | Deferred period | | | | | | | | | | | Members of the Identified Staff with total variable remuneration ≥ 2.7 | | | 40 | % | | 60 | % | | 5 years | Members of the Identified Staff with total variable remuneration ≥ 1.7 (< 2.7) | | | 50 | % | | 50 | % | | 5 years | Other beneficiaries | | | 60 | % | | 40 | % | | 4 years |
Taking the foregoing into account, the bonus for financial years 2018, 20192020, 2021 and 20202022 of the Identified Staff are paid as follows: | ● | Each beneficiary will receive in 2018, 20192020, 2021 and 2020,2022, depending on the group to which such beneficiary belongs, the Immediate Payment Percentage at the Initial Date applicable in each case, in halves and net of income tax (or withholdings), in cash and in shares (the “Initial Date”, meaning the specific date on which the Immediate Payment Percentage is paid). |
| ● | Payment of the Deferred Percentage of the bonus applicable in each case depending on the group to which the beneficiary belongs will be deferred over a period of three or five years and will be paid in thirds or fifths, as applicable, within thirty days of the anniversaries of the Initial Date, provided that the conditions described below are met. |
| ● | After deduction of any income taxes (or withholdings) applicable at any time, the net amount of the deferred portion will be paid in thirds or fifths, 50% in cash and the other 50% in shares of the Bank.shares. |
| ● | The beneficiaries receiving shares of Banco Santander México may not transfer them or hedge them directly or indirectly for one year as from each delivery of shares. |
In 2018, 20192020, 2021 and 2020,2022, the accrual of deferred remuneration is conditioned, in addition to the permanencecontinued employment of the beneficiary in the Bank, to no assumptions in which there is a poor performance of the Bank as a whole or of a specific division or area of the Bank or of the exposures generated by the personnel, and at least the following factors must be considered: (i) significant failures in risk management committed by the Bank, or by a business unit or risk control unit; (ii) the increase suffered by the Bank or by a business unit of its capital needs, not foreseen at the time of generation of the exposures; (iii) regulatory sanctions or court rulings for events that could be attributable to the Bank or the personnel responsible for those. Also, the breach of internal codes of conduct of the Bank; and (iv) irregular behaviors, whether individual or collective, considering in particular the negative effects derived from the marketing of inappropriate products and the responsibilities of persons or bodies that made those decisions. If the abovementioned requirements are met on each delivery date, the bonus beneficiaries shall receive the cash and shares, in thirds or fifths, as applicable, within thirty days of the first, second, third and, if applicable, fourth and fifth anniversary.
43. Other general administrative expenses a) Breakdown The breakdown of Other general administrative expenses is as follows: | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Maintenance, conservation and repair | | | 646 | | | 738 | | | 825 | Information technology and systems | | | 4,820 | | | 3,851 | | | 5,344 | Stationery and supplies | | | 227 | | | 150 | | | 325 | Advertising and communications | | | 890 | | | 965 | | | 809 | Rents | | | 1,120 | | | 653 | | | 683 | Administrative services | | | 503 | | | 1,737 | | | 2,202 | Taxes other than income tax | | | 1,820 | | | 2,037 | | | 2,270 | Surveillance and cash courier services | | | 979 | | | 1,248 | | | 1,263 | Insurance premiums | | | 75 | | | 95 | | | 114 | Travel costs | | | 364 | | | 325 | | | 71 | Other administrative expenses | | | 2,851 | | | 2,031 | | | 1,353 | | | | 14,295 | | | 13,830 | | | 15,259 |
| | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Maintenance, conservation and repair | | | 825 | | | 773 | | | 736 | Information technology and systems | | | 5,344 | | | 5,945 | | | 6,108 | Stationery and supplies | | | 325 | | | 234 | | | 156 | Advertising and communications | | | 809 | | | 696 | | | 753 | Rents | | | 683 | | | 556 | | | 614 | Administrative services | | | 2,202 | | | 1,603 | | | 1,424 | Taxes other than income tax | | | 2,270 | | | 1,915 | | | 2,030 | Surveillance and cash courier services | | | 1,263 | | | 1,237 | | | 1,341 | Insurance premiums | | | 114 | | | 103 | | | 100 | Travel costs | | | 71 | | | 62 | | | 175 | Other administrative expenses | | | 1,353 | | | 1,263 | | | 1,413 | | | | 15,259 | | | 14,387 | | | 14,850 |
b) Other information The fees for audit and tax services to the audit of the consolidated financial statements by the respective auditors are as follows: | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | Audit fees and audit-related fees (*) | | | 88 | | | 103 | | | 122 | Tax fees | | | 1 | | | — | | | — | | | | 89 | | | 103 | | | 122 |
| | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | Audit fees and audit-related fees (*) | | | 122 | | | 99 | | | 105 |
(*) | The audit-related fees amounted to 7 million pesos in 2018, 26 million pesos in 2019 and2020, 32 million pesos in 2020.2021 and 17 million pesos in 2022. |
44. Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) The breakdown of Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) is as follows: | | | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | | | | | | | | Gains: | | | | | | | | | | | | | | | | | | | On disposal of tangible assets | | | 7 | | | 16 | | | 6 | | | 6 | | | 57 | | | 4 | | | | | | | | | | | | | | | | | | | | | | | 7 | | | 16 | | | 6 | | | 6 | | | 57 | | | 4 |
45. Other disclosures a) Remaining maturity periods The breakdown by maturity of the balances of certain items in the consolidated balance sheets as of December 31, 2019,2021, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2019 | | | 12/31/2021 | | | | | | | Less | | | | | | | | | | | | | | | More | | | | | | | | | Less | | | | | | | | | | | | | | | More | | | | | | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | | | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | | | | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total | | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances with the Central Bank | | | 25,793 | | | 11,320 | | | — | | | — | | | — | | | — | | | 28,094 | | | 65,207 | | | 26,360 | | | 12,735 | | | — | | | — | | | — | | | — | | | 23,978 | | | 63,073 | Financial assets at fair value through profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt instruments | | | — | | | 6,917 | | | 18,473 | | | 40,045 | | | 26,379 | | | 15,864 | | | 2,935 | | | 110,613 | | | — | | | 4,197 | | | 31,192 | | | 25,550 | | | 34,552 | | | 8,355 | | | 7,129 | | | 110,975 | Equity instruments | | | 5,767 | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,767 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,764 | | | 2,764 | Trading derivatives | | | 394 | | | 3,552 | | | 3,220 | | | 10,682 | | | 28,308 | | | 34,350 | | | 71,241 | | | 151,747 | | | 147 | | | 2,989 | | | 6,963 | | | 14,418 | | | 48,131 | | | 36,729 | | | 70,013 | | | 179,390 | Other financial assets at fair value through profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions - Reverse repurchase agreements | | | — | | | 54,138 | | | — | | | — | | | — | | | — | | | — | | | 54,138 | | | — | | | 58,486 | | | — | | | — | | | — | | | — | | | — | | | 58,486 | Loans and advances to customers - Reverse repurchase agreements | | | — | | | 25,789 | | | — | | | — | | | — | | | — | | | — | | | 25,789 | | | — | | | 10,000 | | | — | | | — | | | — | | | — | | | — | | | 10,000 | Financial assets at fair value through other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to customers | | | — | | | 71 | | | 71 | | | 713 | | | 571 | | | 1,449 | | | — | | | 2,875 | | | — | | | 450 | | | 900 | | | 2,706 | | | — | | | — | | | — | | | 4,056 | Debt instruments | | | — | | | 31,817 | | | — | | | 4,713 | | | 59,836 | | | 54,636 | | | 82,461 | | | 233,463 | | | — | | | 74,851 | | | 40,537 | | | 2,757 | | | 110,173 | | | 110,586 | | | 52,070 | | | 390,974 | Equity instruments | | | — | | | — | | | — | | | — | | | — | | | — | | | 642 | | | 642 | | | — | | | — | | | — | | | — | | | — | | | 192 | | | 607 | | | 799 | Financial assets at amortized cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions | | | — | | | 36,895 | | | — | | | — | | | — | | | — | | | — | | | 36,895 | | | 19,403 | | | 17,089 | | | — | | | — | | | — | | | — | | | — | | | 36,492 | Loans and advances to customers | | | 8,930 | | | 72,144 | | | 67,861 | | | 127,842 | | | 196,079 | | | 81,576 | | | 145,239 | | | 699,671 | | | 12,538 | | | 50,092 | | | 85,708 | | | 176,794 | | | 173,148 | | | 78,773 | | | 159,944 | | | 736,997 | Debt instruments | | | — | | | — | | | — | | | — | | | 1,607 | | | — | | | 9,650 | | | 11,257 | | | — | | | — | | | — | | | 1,774 | | | — | | | 7,788 | | | 2,057 | | | 11,619 | Hedging derivatives | | | — | | | 1,906 | | | 192 | | | 304 | | | 5,658 | | | 758 | | | 438 | | | 9,256 | | | 125 | | | — | | | — | | | 4,753 | | | 1,803 | | | 4,553 | | | 14 | | | 11,248 | | | | 40,884 | | | 244,549 | | | 89,817 | | | 184,299 | | | 318,438 | | | 188,633 | | | 340,700 | | | 1,407,320 | | | 58,573 | | | 230,889 | | | 165,300 | | | 228,752 | | | 367,807 | | | 246,976 | | | 318,576 | | | 1,616,873 | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at fair value through profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Trading derivatives | | | 395 | | | 3,183 | | | 3,457 | | | 11,185 | | | 25,521 | | | 36,303 | | | 64,437 | | | 144,481 | | | 69 | | | 1,228 | | | 5,944 | | | 15,189 | | | 51,478 | | | 34,068 | | | 68,702 | | | 176,678 | Short positions | | | — | | | 8,280 | | | 47 | | | — | | | — | | | — | | | 792 | | | 9,119 | | | — | | | 19,554 | | | — | | | — | | | — | | | — | | | — | | | 19,554 | Other financial liabilities at fair value through profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from the Central Bank | | | — | | | 111,574 | | | — | | | — | | | — | | | — | | | — | | | 111,574 | | | — | | | 23,002 | | | — | | | — | | | — | | | — | | | — | | | 23,002 | Deposits from credit institutions | | | — | | | 29,689 | | | — | | | — | | | — | | | — | | | — | | | 29,689 | | | — | | | 17,846 | | | — | | | — | | | — | | | — | | | — | | | 17,846 | Customer deposits | | | — | | | 128,634 | | | 582 | | | — | | | — | | | — | | | — | | | 129,216 | | | — | | | 114,078 | | | — | | | — | | | — | | | — | | | — | | | 114,078 | Marketable debt securities | | | — | | | — | | | 263 | | | 2,119 | | | 864 | | | — | | | — | | | 3,246 | | | — | | | — | | | 66 | | | 119 | | | — | | | 74 | | | — | | | 259 | Financial liabilities at amortized cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from the Central Bank | | | | — | | | 78,312 | | | 8,203 | | | 101 | | | — | | | — | | | — | | | 86,616 | Deposits from credit institutions | | | 28,338 | | | 22,934 | | | 8,580 | | | 1,134 | | | 10,374 | | | 57 | | | 1,552 | | | 72,969 | | | 39,213 | | | 38,874 | | | 1,523 | | | 2,406 | | | 15 | | | 22 | | | 1,286 | | | 83,339 | Customer deposits | | | 424,563 | | | 106,523 | | | 36,512 | | | 54,805 | | | 3,858 | | | 3,032 | | | 762 | | | 630,055 | | | 541,585 | | | 153,372 | | | 20,416 | | | 52,728 | | | 3,669 | | | 4,558 | | | 1,558 | | | 777,886 | Marketable debt securities | | | — | | | 19,412 | | | 13,464 | | | 36,430 | | | 31,755 | | | — | | | 10,150 | | | 111,211 | | | — | | | 14,355 | | | 2,049 | | | 29,009 | | | | | | 49,510 | | | 6,500 | | | 101,423 | Subordinated liabilities | | | — | | | — | | | 365 | | | — | | | — | | | — | | | 33,902 | | | 34,267 | | | — | | | 10,254 | | | — | | | 397 | | | — | | | — | | | 40,992 | | | 51,643 | Other financial liabilities | | | 49 | | | 9,722 | | | 1,079 | | | 4,765 | | | 149 | | | — | | | — | | | 15,764 | | | 10,571 | | | 3,690 | | | 104 | | | 2,692 | | | 177 | | | 4 | | | — | | | 17,238 | Hedging derivatives | | | — | | | 1 | | | 8 | | | 897 | | | 488 | | | 1,885 | | | 4,244 | | | 7,523 | | | 1 | | | — | | | — | | | 38 | | | 1,096 | | | 2,700 | | | 4,327 | | | 8,162 | | | | 453,345 | | | 439,952 | | | 64,357 | | | 111,335 | | | 73,009 | | | 41,277 | | | 115,839 | | | 1,299,114 | | | 591,439 | | | 474,565 | | | 38,305 | | | 102,679 | | | 56,435 | | | 90,936 | | | 123,365 | | | 1,477,724 | Difference (assets less liabilities) | | | (412,461) | | | (195,403) | | | 25,460 | | | 72,964 | | | 245,429 | | | 147,356 | | | 224,861 | | | 108,206 | | | (532,866) | | | (243,676) | | | 126,995 | | | 126,073 | | | 311,372 | | | 156,040 | | | 195,211 | | | 139,149 |
The breakdown by maturity of the balances of certain items in the consolidated balance sheets as of December 31, 2020,2022, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2020 | | | 12/31/2022 | | | | | | | Less | | | | | | | | | | | | | | | More | | | | | | | | | Less | | | | | | | | | | | | | | | More | | | | | | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | | | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | | | | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total | | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and balances with the Central Bank | | | 24,791 | | | 22,284 | | | — | | | — | | | — | | | — | | | 23,978 | | | 71,053 | | | 37,543 | | | 11,294 | | | — | | | — | | | — | | | — | | | 23,978 | | | 72,815 | Financial assets at fair value through profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt instruments | | | | | | 15,109 | | | 20,263 | | | 106,579 | | | 42,477 | | | 15,254 | | | 6,590 | | | 206,272 | | | — | | | 7,009 | | | 20,031 | | | 34,030 | | | 51,027 | | | 8,255 | | | 9,897 | | | 130,249 | Equity instruments | | | 1,911 | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,911 | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,063 | | | 4,063 | Trading derivatives | | | 274 | | | 4,542 | | | 11,267 | | | 20,524 | | | 62,867 | | | 60,444 | | | 136,253 | | | 296,171 | | | 331 | | | 2,475 | | | 7,417 | | | 27,459 | | | 67,736 | | | 51,662 | | | 71,736 | | | 228,816 | Other financial assets at fair value through profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions - Reverse repurchase agreements | | | — | | | 59,512 | | | — | | | — | | | — | | | — | | | — | | | 59,512 | | | — | | | 93,267 | | | — | | | 9,385 | | | — | | | — | | | — | | | 102,652 | Loans and advances to customers - Reverse repurchase agreements | | | — | | | 10,844 | | | — | | | — | | | — | | | — | | | — | | | 10,844 | | | — | | | 19,207 | | | — | | | — | | | — | | | — | | | — | | | 19,207 | Financial assets at fair value through other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to customers | | | | | | | | | | | | | | | | | | | | | | | | — | | | — | | | 95 | | | 188 | | | 594 | | | 38 | | | 31 | | | — | | | 946 | Debt instruments | | | | | | 81,142 | | | 3,833 | | | 24,881 | | | 105,799 | | | 42,950 | | | 96,716 | | | 355,321 | | | — | | | 9,443 | | | 65,891 | | | 5,391 | | | 83,423 | | | 117,274 | | | 32,484 | | | 313,906 | Equity instruments | | | — | | | — | | | — | | | — | | | — | | | — | | | 768 | | | 768 | | | — | | | — | | | — | | | — | | | — | | | 110 | | | 587 | | | 697 | Financial assets at amortized cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions | | | | | | 64,371 | | | — | | | — | | | — | | | — | | | — | | | 64,371 | | | — | | | 40,400 | | | — | | | — | | | — | | | — | | | — | | | 40,400 | Loans and advances to customers | | | 11,475 | | | 40,220 | | | 73,035 | | | 135,294 | | | 191,615 | | | 82,995 | | | 152,798 | | | 687,432 | | | 4,034 | | | 52,944 | | | 108,526 | | | 186,273 | | | 205,255 | | | 83,851 | | | 156,833 | | | 797,716 | Debt instruments | | | — | | | — | | | — | | | — | | | 1,699 | | | 7,785 | | | 1,969 | | | 11,453 | | | — | | | — | | | — | | | — | | | 16,537 | | | 4,038 | | | 1,666 | | | 22,241 | Hedging derivatives | | | 300 | | | 1 | | | — | | | 160 | | | 5,391 | | | 2,454 | | | — | | | 8,306 | | | 1,502 | | | 47 | | | 164 | | | 171 | | | 3,584 | | | 3,638 | | | 1,075 | | | 10,181 | | | | 38,751 | | | 298,025 | | | 108,398 | | | 287,438 | | | 409,848 | | | 211,882 | | | 419,072 | | | 1,773,414 | | | 43,410 | | | 236,181 | | | 202,217 | | | 263,303 | | | 427,600 | | | 268,859 | | | 302,319 | | | 1,743,889 | Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at fair value through profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Trading derivatives | | | 422 | | | 3,447 | | | 11,006 | | | 17,891 | | | 58,959 | | | 60,541 | | | 133,845 | | | 286,111 | | | 623 | | | 3,488 | | | 7,182 | | | 28,935 | | | 65,112 | | | 51,958 | | | 73,890 | | | 231,188 | Short positions | | | — | | | 15,365 | | | — | | | — | | | — | | | — | | | — | | | 15,365 | | | — | | | 28,762 | | | — | | | — | | | — | | | — | | | — | | | 28,762 | Other financial liabilities at fair value through profit or loss | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from the Central Bank | | | — | | | 24,937 | | | — | | | — | | | — | | | — | | | — | | | 24,937 | | Deposits from credit institutions | | | — | | | 54,922 | | | — | | | — | | | — | | | — | | | — | | | 54,922 | | Customer deposits | | | — | | | 130,292 | | | — | | | — | | | — | | | — | | | — | | | 130,292 | | Deposits from Central Bank – Repurchase agreements | | | | — | | | 31,055 | | | — | | | — | | | — | | | — | | | — | | | 31,055 | Deposits from credit institutions – Repurchase agreements | | | | — | | | 22,818 | | | — | | | — | | | — | | | — | | | — | | | 22,818 | Customer deposits – Repurchase agreements | | | | — | | | 114,308 | | | 5,461 | | | — | | | — | | | — | | | — | | | 119,769 | Marketable debt securities | | | — | | | 163 | | | 524 | | | 621 | | | 55 | | | — | | | — | | | 1,363 | | | — | | | 10 | | | 112 | | | 249 | | | 77 | | | 72 | | | — | | | 520 | Financial liabilities at amortized cost | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from the Central Bank | | | — | | | 126,299 | | | — | | | — | | | 30 | | | — | | | — | | | 126,329 | | Deposits from Central Bank | | | | — | | | 89,753 | | | — | | | — | | | — | | | — | | | — | | | 89,753 | Deposits from credit institutions | | | 28,061 | | | 11,670 | | | 3,099 | | | 10,751 | | | 6,163 | | | 38 | | | 1,392 | | | 61,174 | | | 26,523 | | | 29,036 | | | 1,455 | | | 2,159 | | | 5,009 | | | 123 | | | 1,049 | | | 65,354 | Deposits from credit institutions - Repurchase agreements | | | | — | | | 9,003 | | | — | | | — | | | — | | | — | | | — | | | 9,003 | Customer deposits | | | 499,711 | | | 156,765 | | | 28,302 | | | 49,235 | | | 4,027 | | | 3,231 | | | 930 | | | 742,201 | | | 538,955 | | | 138,171 | | | 21,437 | | | 74,859 | | | 4,038 | | | 3,271 | | | 876 | | | 781,607 | Customer deposits - Repurchase agreements | | | | — | | | 26,912 | | | 10 | | | — | | | — | | | — | | | — | | | 26,922 | Marketable debt securities | | | — | | | 20,358 | | | 6,774 | | | 31,535 | | | 27,135 | | | 34,756 | | | 10,196 | | | 130,754 | | | — | | | 23,933 | | | 11,202 | | | 30,217 | | | 37,682 | | | 22,278 | | | 9,081 | | | 134,393 | Subordinated liabilities | | | | | | — | | | — | | | 346 | | | — | | | — | | | 35,836 | | | 36,182 | | | — | | | — | | | — | | | 366 | | | — | | | — | | | 39,018 | | | 39,384 | Other financial liabilities | | | 8,294 | | | 2,289 | | | 1,136 | | | 2,616 | | | 980 | | | — | | | — | | | 15,315 | | | — | | | 14,741 | | | 2,507 | | | 2,050 | | | 175 | | | — | | | — | | | 19,473 | Hedging derivatives | | | 4 | | | — | | | — | | | 131 | | | 2,029 | | | 3,925 | | | 12,989 | | | 19,078 | | | — | | | — | | | — | | | 306 | | | 2,143 | | | 1,097 | | | 915 | | | 4,461 | | | | 536,492 | | | 546,507 | | | 50,841 | | | 113,126 | | | 99,378 | | | 102,491 | | | 195,188 | | | 1,644,023 | | | 566,101 | | | 531,990 | | | 49,366 | | | 139,141 | | | 114,236 | | | 78,799 | | | 124,829 | | | 1,604,462 | Difference (assets less liabilities) | | | (497,741) | | | (248,482) | | | 57,557 | | | 174,312 | | | 310,470 | | | 109,391 | | | 223,884 | | | 129,391 | | | (522,691) | | | (295,809) | | | 152,851 | | | 124,162 | | | 313,364 | | | 190,060 | | | 177,490 | | | 139,427 |
b) Undiscounted contractual maturity periods The detail of the undiscounted contractual maturities of the existing financial liabilities at amortized cost as of December 31, 2019,2021, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2019 | | | | | | | Less | | | | | | | | | | | | | | | More | | | | | | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | | | | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at amortized cost: | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from credit institutions | | | 28,338 | | | 23,211 | | | 8,991 | | | 2,142 | | | 12,218 | | | 305 | | | 3,106 | | | 78,311 | Customer deposits | | | 424,563 | | | 107,681 | | | 38,195 | | | 59,092 | | | 5,015 | | | 3,616 | | | 1,233 | | | 639,395 | Marketable debt securities | | | — | | | 20,071 | | | 15,096 | | | 42,001 | | | 37,716 | | | 1,444 | | | 13,759 | | | 130,087 | Subordinated liabilities | | | — | | | 188 | | | 376 | | | 1,694 | | | 4,514 | | | 4,514 | | | 46,646 | | | 57,932 | Other financial liabilities | | | 49 | | | 9,722 | | | 1,079 | | | 4,765 | | | 149 | | | — | | | — | | | 15,764 | | | | 452,950 | | | 160,873 | | | 63,737 | | | 109,694 | | | 59,612 | | | 9,879 | | | 64,744 | | | 921,489 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2021 | | | | | | | Less | | | | | | | | | | | | | | | More | | | | | | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | | | | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at amortized cost: | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from the Central Bank | | | — | | | 78,399 | | | 8,228 | | | 102 | | | — | | | — | | | — | | | 86,729 | Deposits from credit institutions | | | 39,213 | | | 39,039 | | | 1,589 | | | 2,595 | | | 150 | | | 155 | | | 2,136 | | | 84,877 | Customer deposits | | | 541,585 | | | 154,195 | | | 21,356 | | | 55,574 | | | 4,657 | | | 5,178 | | | 2,190 | | | 784,735 | Marketable debt securities | | | — | | | 14,742 | | | 3,043 | | | 32,892 | | | 5,116 | | | 54,626 | | | 7,984 | | | 118,403 | Subordinated liabilities | | | — | | | 10,463 | | | 417 | | | 2,275 | | | 5,007 | | | 5,007 | | | 55,095 | | | 78,264 | Other financial liabilities | | | 10,436 | | | 3,689 | | | 995 | | | 1,753 | | | 365 | | | — | | | — | | | 17,238 | | | | 591,234 | | | 300,527 | | | 35,628 | | | 95,191 | | | 15,295 | | | 64,966 | | | 67,405 | | | 1,170,246 |
The detail of the undiscounted contractual maturities of the existing financial liabilities at amortized cost as of December 31, 2020,2022, is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12/31/2020 | | 12/31/2022 | | | | | | | Less | | | | | | | | | | | | | | | More | | | | | | | | | Less | | | | | | | | | | | | | | | More | | | | | | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | | | | On | | | than 1 | | | 1 to 3 | | | 3 to 12 | | | 1 to 3 | | | 3 to 5 | | | than 5 | | | | | | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total | | | Demand | | | Month | | | Months | | | Months | | | Years | | | Years | | | Years | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at amortized cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from the Central Bank | | | — | | | 126,454 | | | — | | | — | | | 31 | | | — | | | — | | | 126,485 | | | — | | | 89,863 | | | — | | | — | | | — | | | — | | | — | | | 89,863 | Deposits from credit institutions | | | 28,061 | | | 11,854 | | | 3,461 | | | 11,991 | | | 7,189 | | | 231 | | | 2,615 | | | 65,402 | | | 26,523 | | | 38,267 | | | 1,621 | | | 2,722 | | | 5,845 | | | 282 | | | 1,970 | | | 77,230 | Customer deposits | | | 499,711 | | | 158,037 | | | 29,693 | | | 52,967 | | | 5,130 | | | 3,794 | | | 1,431 | | | 750,763 | | | 538,955 | | | 166,428 | | | 23,128 | | | 80,235 | | | 5,140 | | | 3,831 | | | 1,350 | | | 819,067 | Marketable debt securities | | | — | | | 20,808 | | | 7,914 | | | 35,816 | | | 33,092 | | | 38,471 | | | 12,302 | | | 148,403 | | | — | | | 24,396 | | | 12,343 | | | 34,317 | | | 43,387 | | | 24,869 | | | 10,957 | | | 150,269 | Subordinated liabilities | | | — | | | 198 | | | 398 | | | 2,173 | | | 4,767 | | | 4,767 | | | 49,253 | | | 61,556 | | | — | | | 191 | | | 382 | | | 2,085 | | | 4,586 | | | 4,586 | | | 51,991 | | | 63,821 | Other financial liabilities | | | 8,294 | | | 2,289 | | | 1,136 | | | 2,616 | | | 980 | | | — | | | — | | | 15,315 | | | — | | | 14,741 | | | 2,507 | | | 2,050 | | | 175 | | | — | | | — | | | 19,473 | | | | 536,066 | | | 193,186 | | | 42,602 | | | 105,563 | | | 51,158 | | | 47,263 | | | 65,601 | | | 1,041,439 | | | 565,478 | | | 333,886 | | | 39,981 | | | 121,409 | | | 59,133 | | | 33,568 | | | 66,268 | | | 1,219,723 |
c) Foreign currency balances The breakdown of the main foreign currency balances in the consolidated balance sheet based on the nature of the related items is as follows: | | | | | | | | | | | | | | | | Equivalent Value in Millions of Pesos | | | | 12/31/2019 | | 12/31/2020 | | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | | | | | | | | | | | | Cash and balances with the Central Bank | | | 4,254 | | | — | | | 3,657 | | | — | Debt instruments (Note 8) | | | 112,201 | | | — | | | 167,862 | | | — | Loans and advances to credit institutions (Note 7) | | | 17,765 | | | — | | | 29,799 | | | — | Loans and advances to customers | | | 68,653 | | | — | | | 67,689 | | | — | Other assets | | | 2,701 | | | — | | | 498 | | | — | Marketable debt securities (Note 21) | | | — | | | 25,224 | | | — | | | 55,875 | Subordinated liabilities | | | — | | | 34,300 | | | — | | | 36,204 | Derivatives | | | — | | | 50,335 | | | — | | | 69,933 | Deposits from Central Bank | | | — | | | — | | | — | | | 14,934 | Deposits from credit institutions (Note 19) | | | — | | | 18,628 | | | — | | | 12,597 | Customer deposits (Note 20) | | | — | | | 81,637 | | | — | | | 86,780 | Other financial liabilities | | | — | | | 1,306 | | | — | | | 646 | Other liabilities | | | — | | | 1,942 | | | — | | | 6,627 |
| | | | | | | | | | | | | | | | Equivalent Value in Millions of Pesos | | | | 12/31/2021 | | 12/31/2022 | | | | Assets | | | Liabilities | | | Assets | | | Liabilities | | | | | | | | | | | | | | Cash and balances with the Central Bank | | | 3,727 | | | — | | | 3,307 | | | — | Debt instruments (Note 8) | | | 202,775 | | | — | | | 122,692 | | | — | Loans and advances to credit institutions (Note 7) | | | 28,594 | | | — | | | 55,696 | | | — | Loans and advances to customers | | | 78,504 | | | — | | | 81,477 | | | — | Other assets | | | 387 | | | — | | | 159 | | | — | Marketable debt securities (Note 21) | | | — | | | 56,995 | | | — | | | 35,724 | Subordinated liabilities | | | — | | | 51,654 | | | — | | | 39,389 | Derivatives | | | — | | | 73,858 | | | — | | | 52,890 | Deposits from Central Bank | | | — | | | — | | | — | | | — | Deposits from credit institutions (Note 19) | | | — | | | 33,467 | | | — | | | 30,933 | Customer deposits (Note 20) | | | — | | | 92,987 | | | — | | | 94,975 | Other financial liabilities | | | — | | | 1,057 | | | — | | | 2,543 | Other liabilities | | | — | | | 3,184 | | | — | | | 5,060 |
d) Fair value of financial assets and financial liabilities that are not measured at fair value (but fair value disclosures are required) i. Financial assets measured at other than fair value The following table sets out the fair values of financial assets not measured at fair value and analyzes them by the level in the fair value hierarchy into which each fair value measurement is categorized. Except as detailed in the following table, the Bank considers the carrying amounts of financial assets recognized in the consolidated financial statements approximate their fair values. As of December 31, 2019:2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total fair | | | Total | Assets | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount | | | | | | | | | | | | | | | | | Financial assets at amortized cost: | | | | | | | | | | | | | | | | Loans and advances to credit institutions (Note 7) | | | — | | | 21,616 | | | 15,146 | | | 36,762 | | | 36,895 | Loans and advances to customers (Note 11) | | | — | | | 2,892 | | | 727,334 | | | 730,226 | | | 699,671 | Debt instruments (unlisted) (Note 8) | | | — | | | 11,257 | | | — | | | 11,257 | | | 11,257 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Total fair | | | Total | Assets | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount | | | | | | | | | | | | | | | | | Financial assets at amortized cost: | | | | | | | | | | | | | | | | Loans and advances to credit institutions (Note 7) | | | — | | | 16,551 | | | 19,842 | | | 36,393 | | | 36,492 | Loans and advances to customers (Note 11) | | | — | | | 191 | | | 738,646 | | | 738,837 | | | 736,997 | Debt instruments (unlisted) (Note 8) | | | — | | | 11,619 | | | — | | | 11,619 | | | 11,619 |
As of December 31, 2020:2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total fair | | | Total | | | | | | | | | | | | Total fair | | | Total | Assets | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial assets at amortized cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and advances to credit institutions (Note 7) | | | — | | | 28,702 | | | 35,652 | | | 64,354 | | | 64,371 | | | — | | | 17,971 | | | 22,839 | | | 40,810 | | | 40,400 | Loans and advances to customers (Note 11) | | | — | | | 646 | | | 741,672 | | | 742,318 | | | 687,432 | | | — | | | 320 | | | 770,130 | | | 770,450 | | | 797,716 | Debt instruments (unlisted) (Note 8) | | | — | | | 11,454 | | | — | | | 11,454 | | | 11,453 | | | 12,248 | | | 10,010 | | | — | | | 22,258 | | | 22,241 |
Other financial instruments not carried at fair value are typically short-term in nature and reprise to current market rates frequently and their carrying amount approximates fair value such as Balances with the Central Bank. ii. Financial liabilities measured at other than fair value The following table sets out the fair values of financial liabilities not measured at fair value and analyzes them by the level in the fair value hierarchy into which each fair value measurement is categorized. Except as detailed in the following table, the Bank considers the carrying amounts of financial liabilities recognized in the consolidated financial statements approximate their fair values. As of December 31, 2019:2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total fair | | | Total | | | | | | | | | | | | Total fair | | | Total | Liabilities | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at amortized cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from the Central Bank - Repurchase agreements (Note 19) | | | | — | | | 86,608 | | | — | | | 86,608 | | | 86,616 | Deposits from credit institutions (Note 19) | | | — | | | 65,382 | | | 7,272 | | | 72,654 | | | 72,969 | | | — | | | 26,892 | | | 51,337 | | | 78,229 | | | 78,182 | Deposits from credit institutions - Repurchase agreements (Note 19) | | | | — | | | 5,156 | | | — | | | 5,156 | | | 5,157 | Customer deposits (Note 20) | | | — | | | 629,684 | | | — | | | 629,684 | | | 630,055 | | | — | | | 52,566 | | | 706,455 | | | 759,021 | | | 760,325 | Customer deposits - Repurchase agreements (Note 20) | | | | — | | | 17,559 | | | — | | | 17,559 | | | 17,561 | Marketable debt securities (Note 21) | | | 111,342 | | | — | | | — | | | 111,342 | | | 111,211 | | | 104,582 | | | — | | | — | | | 104,582 | | | 101,423 | Subordinated liabilities (Note 22) | | | 36,555 | | | — | | | — | | | 36,555 | | | 34,267 | | | 38,911 | | | 14,375 | | | — | | | 53,286 | | | 51,643 | Other financial liabilities (Note 23) | | | 15,760 | | | — | | | — | | | 15,760 | | | 15,764 | | | — | | | 9,841 | | | 7,359 | | | 17,200 | | | 17,238 |
As of December 31, 2020:2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total fair | | | Total | | | | | | | | | | | | Total fair | | | Total | Liabilities | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount | | | Level 1 | | | Level 2 | | | Level 3 | | | values | | | carrying amount | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities at amortized cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits from the Central Bank - Repurchase agreements (Note 19) | | | — | | | 126,293 | | | 30 | | | 126,323 | | | 126,329 | | | — | | | 89,751 | | | — | | | 89,751 | | | 89,753 | Deposits from credit institutions (Note 19) | | | — | | | — | | | 61,033 | | | 61,033 | | | 61,174 | | | — | | | 24,633 | | | 39,884 | | | 64,517 | | | 65,354 | Deposits from credit institutions - Repurchase agreements (Note 19) | | | | — | | | 9,003 | | | — | | | 9,003 | | | 9,003 | Customer deposits (Note 20) | | | — | | | 85,332 | | | 656,593 | | | 741,925 | | | 733,877 | | | — | | | 62,041 | | | 718,445 | | | 780,486 | | | 781,607 | Customer deposits - Repurchase agreements (Note 20) | | | — | | | 8,323 | | | — | | | 8,323 | | | 8,324 | | | — | | | 26,922 | | | — | | | 26,922 | | | 26,922 | Marketable debt securities (Note 21) | | | 137,429 | | | — | | | — | | | 137,429 | | | 130,754 | | | 133,229 | | | — | | | — | | | 133,229 | | | 134,393 | Subordinated liabilities (Note 22) | | | 39,406 | | | — | | | — | | | 39,406 | | | 36,182 | | | 25,655 | | | 13,905 | | | — | | | 39,560 | | | 39,384 | Other financial liabilities (Note 23) | | | — | | | 7,522 | | | 7,961 | | | 15,483 | | | 15,486 | | | — | | | 10,891 | | | 8,575 | | | 19,466 | | | 19,473 |
The methodology and inputs used to calculate the fair value for each financial asset and liability class are as follows: | - | Loans and advances at amortized cost at a variable or fixed interest rate and maturing in less than one year: Their fair value has been estimated to match their book value because there are no material differences. |
| - | Loans and advances at amortized cost with maturity greater than one year: Fair value has been obtained using the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate, but also using certain non-observable market input, such as the credit risk associated with the loan portfolio for the allowance of future flows and current loan portfolio conditions (net commissions, operating expenses, medium-term, etc.). |
| - | Unlisted debt instruments: Their fair value has been estimated to be equal to their amortized cost given that, because they are non-negotiable financial instruments issued by the Mexican Government, this value would be considered to execute a prepayment transaction at fair value. |
| - | Financial liabilities at amortized cost at a variable or fixed interest rate and maturing in less than one year: Their fair value has been estimated to match their book value because there are no material differences. |
| - | Financial liabilities at amortized cost with maturity greater than one year: Their fair value has been obtained by using the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate. |
| - | Marketable debt securities and subordinated liabilities: Fair value has been obtained using quoted market price, if available, or the present value model that discounts future cash flows at the current date using interest rates based on directly or indirectly observable market data to calculate the discount rate. For level 2, the Bank uses quoted prices for similar liabilities in active markets. |
| - | Other financial liabilities: Their fair value has been estimated to be equal to their amortized cost since they are mainly composed by short-term balances. |
e) Significant restrictions See Note 49.d for significant restrictions on the ability to access or use the assets and settle the liabilities of the Bank as of December 31, 2020.2022. f) Restriction on Accumulated reserves distribution As of December 31, 20192021 and 2020,2022, the Bank did not have any restriction on Accumulated reserves distribution, except for the legal reserve as mentioned in Note 29 (12,971(16,365 million pesos in legal reserve that includes 9,61612,710 million pesos in legal reserve of Banco Santander México on an individual basis as of December 31, 20192021 and 14,34616,365 million pesos in legal reserve that includes 11,21713,971 million pesos in legal reserve of Banco Santander México on an individual basis as of December 31, 2020),2022) and the remeasurement of defined benefit obligation and the recognition of equity-settled share-based payments.obligation. In addition, the Bank is restricted from distributing dividends that will result in non-compliance with minimum capitalization requirements established by the CNBV (see Note 30).
46. Operating segments The Bank has three operating segments, as described below: | - | Retail Banking: this segment encompasses the entire commercial banking business. The retail banking activities include products and services for SME such as personal loans, deposit-taking, employee payroll accounts for corporate customers, credit and debit cards and overdraft facilities. |
| - | Corporate and Investment Banking: this segment reflects the Santander Corporate and Investment Banking business in Mexico, including all the managed treasury departments and the equities business. The Santander Corporate and Investment Banking activities include products and services for our corporate customers, such as investment banking and project finance. |
| - | Corporate Activities: this segment includes the centralized management business relating to financial and industrial investments, the financial management of the structural currency position and its structural interest rate risk position and the management of liquidity and equity through issues and securitizations and assets and liabilities management. |
The Bank does not have any customers that individually accounted for 10% or more of the Bank’s interest and similar income for 2018, 20192020, 2021 and 2020. The 2018 consolidated income statement and other significant data are as follows:
| | | | | | | | | | | | | | | | | | | | Corporate | | | | | | | | | | | Retail | | | and Investment | | | Corporate | | | | | 2018 | | | Banking | | | Banking | | | Activities | | | Total | | | | | | | | | | | | | | | | Net interest income | | | 54,005 | | | 6,121 | | | 1,871 | | | 61,997 | | Dividend income | | | — | | | 34 | | | 176 | | | 210 | | Net fee and commission income | | | 14,181 | | | 1,700 | | | (159) | | | 15,722 | | Gains/(losses) on financial assets and liabilities (net) | | | 1,086 | | | 689 | | | (291) | | | 1,484 | | Other operating income/(expenses) | | | (2,561) | | | (672) | | | (412) | | | (3,645) | | Total income | | | 66,711 | | | 7,872 | | | 1,185 | | | 75,768 | | Administrative expenses | | | (24,574) | | | (3,530) | | | (545) | | | (28,649) | | Depreciation and amortization | | | (2,769) | | | (200) | | | (4) | | | (2,973) | | Impairment losses on financial assets (net) | | | (17,813) | | | (997) | | | — | | | (18,810) | | Impairment losses on other assets (net) | | | — | | | — | | | (5) | | | (5) | | Provisions (net) | | | 178 | | | 10 | | | (750) | | | (562) | | Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | | | — | | | — | | | 7 | | | 7 | | Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | | | — | | | — | | | 38 | | | 38 | | Operating profit before tax | | | 21,733 | | | 3,155 | | | (74) | | | 24,814 | | Income tax | | | | | | | | | | | | (5,458) | | Profit for the year | | | | | | | | | | | | 19,356 | | Profit attributable to the Parent | | | | | | | | | | | | 19,353 | | Profit attributable to non-controlling interest | | | | | | | | | | | | 3 | | Total assets | | | 599,270 | | | 547,006 | | | 262,448 | | | 1,408,724 | | Total liabilities | | | 567,829 | | | 486,372 | | | 231,236 | | | 1,285,437 | |
2022.
The 2019 consolidated income statement and other significant data are as follows:
| | | | | | | | | | | | | | | | | | | | Corporate | | | | | | | | | | | Retail | | | and Investment | | | Corporate | | | | | 2019 | | | Banking | | | Banking | | | Activities | | | Total | | | | | | | | | | | | | | | | Net interest income | | | 59,008 | | | 6,638 | | | 510 | | | 66,156 | | Dividend income | | | — | | | 44 | | | 191 | | | 235 | | Net fee and commission income | | | 15,014 | | | 1,596 | | | (186) | | | 16,424 | | Gains/(losses) on financial assets and liabilities (net) | | | 1,155 | | | 1,417 | | | 282 | | | 2,854 | | Other operating income/(expenses) | | | (2,389) | | | (690) | | | (513) | | | (3,592) | | Total income | | | 72,788 | | | 9,005 | | | 284 | | | 82,077 | | Administrative expenses | | | (25,064) | | | (3,604) | | | (590) | | | (29,258) | | Depreciation and amortization | | | (4,827) | | | (381) | | | (14) | | | (5,222) | | Impairment losses on financial assets not at fair value through profit or loss (net) | | | (18,986) | | | (234) | | | — | | | (19,220) | | Impairment losses on other assets (net) | | | (370) | | | — | | | — | | | (370) | | Provisions (net) | | | (165) | | | (1) | | | (609) | | | (775) | | Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | | | — | | | — | | | 16 | ��� | | 16 | | Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | | | — | | | — | | | 42 | | | 42 | | Operating profit before tax | | | 23,376 | | | 4,785 | | | (871) | | | 27,290 | | Income tax | | | | | | | | | | | | (6,909) | | Profit for the year | | | | | | | | | | | | 20,381 | | Profit attributable to the Parent | | | | | | | | | | | | 20,381 | | Profit attributable to non-controlling interest | | | | | | | | | | | | — | | Total assets | | | 628,380 | | | 529,901 | | | 309,267 | | | 1,467,548 | | Total liabilities | | | 618,477 | | | 509,204 | | | 205,069 | | | 1,332,750 | |
The 2020 consolidated income statement and other significant data are as follows: | | | | | | | | | | | | | | | | | | | | Corporate | | | | | | | | | | | Retail | | | and Investment | | | Corporate | | | | | 2020 | | | Banking | | | Banking | | | Activities | | | Total | | | | | | | | | | | | | | | | Net interest income | | | 61,444 | | | 5,605 | | | (1,239) | | | 65,810 | | Dividend income | | | — | | | 39 | | | 207 | | | 246 | | Income from companies accounted for using the equity method | | | — | | | — | | | 178 | | | 178 | | Net fee and commission income | | | 15,551 | | | 1,668 | | | (196) | | | 17,023 | | Gains/(losses) on financial assets and liabilities (net) | | | 1,421 | | | 3,888 | | | 675 | | | 5,984 | | Exchange differences (net) | | | — | | | — | | | 19 | | | 19 | | Other operating income/(expenses) | | | (2,695) | | | (714) | | | (153) | | | (3,562) | | Total income | | | 75,721 | | | 10,486 | | | (509) | | | 85,698 | | Administrative expenses | | | (25,649) | | | (3,830) | | | (656) | | | (30,135) | | Depreciation and amortization | | | (5,339) | | | (376) | | | (28) | | | (5,743) | | Impairment losses on financial assets not at fair value through profit or loss (net) | | | (20,772) | | | (1,027) | | | — | | | (21,799) | | Gains/(losses) on modification of financial assets (net) | | | (1,743) | | | — | | | — | | | (1,743) | | Impairment losses on other assets (net) | | | (119) | | | — | | | — | | | (119) | | Provisions (net) | | | (143) | | | (10) | | | (821) | | | (974) | | Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | | | — | | | — | | | 6 | | | 6 | | Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | | | — | | | — | | | 9 | | | 9 | | Operating profit before tax | | | 21,956 | | | 5,243 | | | (1,999) | | | 25,200 | | Income tax | | | | | | | | | | | | (6,226) | | Profit for the year | | | | | | | | | | | | 18,974 | | Profit attributable to the Parent | | | | | | | | | | | | 18,974 | | Profit attributable to non-controlling interest | | | | | | | | | | | | — | | Total assets | | | 654,572 | | | 760,895 | | | 422,447 | | | 1,837,914 | | Total liabilities | | | 676,529 | | | 783,942 | | | 223,609 | | | 1,684,080 | |
| | | | | | | | | | | | | | | | | | | | Global | | | | | | | | | | | Retail | | | Corporate | | | Corporate | | | | | 2020 | | | Banking | | | Banking | | | Activities | | | Total | | | | | | | | | | | | | | | | Net interest income | | | 61,444 | | | 5,605 | | | (1,239) | | | 65,810 | | Dividend income | | | — | | | 39 | | | 207 | | | 246 | | Income from companies accounted for using the equity method | | | — | | | — | | | 178 | | | 178 | | Net fee and commission income | | | 15,551 | | | 1,668 | | | (196) | | | 17,023 | | Gains/(losses) on financial assets and liabilities (net) | | | 1,421 | | | 3,888 | | | 675 | | | 5,984 | | Exchange differences (net) | | | — | | | — | | | 19 | | | 19 | | Other operating income/(expenses) | | | (2,695) | | | (714) | | | (153) | | | (3,562) | | Total income | | | 75,721 | | | 10,486 | | | (509) | | | 85,698 | | Administrative expenses | | | (25,649) | | | (3,830) | | | (656) | | | (30,135) | | Depreciation and amortization | | | (5,339) | | | (376) | | | (28) | | | (5,743) | | Impairment losses on financial assets not at fair value through profit or loss (net) | | | (20,772) | | | (1,027) | | | — | | | (21,799) | | Gains/(losses) on modification of financial assets (net) | | | (1,743) | | | — | | | — | | | (1,743) | | Impairment losses on other assets (net) | | | (119) | | | — | | | — | | | (119) | | Provisions (net) | | | (143) | | | (10) | | | (821) | | | (974) | | Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | | | — | | | — | | | 6 | | | 6 | | Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | | | — | | | — | | | 9 | | | 9 | | Operating profit before tax | | | 21,956 | | | 5,243 | | | (1,999) | | | 25,200 | | Income tax | | | | | | | | | | | | (6,226) | | Profit for the year | | | | | | | | | | | | 18,974 | | Profit attributable to the Parent | | | | | | | | | | | | 18,974 | | Profit attributable to non-controlling interest | | | | | | | | | | | | — | | Total assets | | | 654,572 | | | 760,895 | | | 422,447 | | | 1,837,914 | | Total liabilities | | | 676,529 | | | 783,942 | | | 223,609 | | | 1,684,080 | |
F-182 The 2021 consolidated income statement and other significant data are as follows: | | | | | | | | | | | | | | | | | | | | Corporate | | | | | | | | | | | Retail | | | and Investment | | | Corporate | | | | | 2021 | | | Banking | | | Banking | | | Activities | | | Total | | | | | | | | | | | | | | | | Net interest income | | | 58,045 | | | 4,295 | | | 1,092 | | | 63,432 | | Dividend income | | | — | | | 29 | | | 198 | | | 227 | | Income from companies accounted for using the equity method | | | — | | | — | | | 200 | | | 200 | | Net fee and commission income | | | 15,729 | | | 1,594 | | | (117) | | | 17,206 | | Gains/(losses) on financial assets and liabilities (net) | | | 1,493 | | | 3,228 | | | 162 | | | 4,883 | | Exchange differences (net) | | | — | | | — | | | (35) | | | (35) | | Other operating income/(expenses) | | | (2,967) | | | (508) | | | 9 | | | (3,466) | | Total income | | | 72,300 | | | 8,638 | | | 1,509 | | | 82,447 | | Administrative expenses | | | (26,525) | | | (3,810) | | | (537) | | | (30,872) | | Depreciation and amortization | | | (5,849) | | | (364) | | | (30) | | | (6,243) | | Impairment losses on financial assets not at fair value through profit or loss (net) | | | (18,115) | | | (1,114) | | | — | | | (19,229) | | Impairment losses on other assets (net) | | | (27) | | | — | | | — | | | (27) | | Provisions (net) | | | 200 | | | — | | | (586) | | | (386) | | Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | | | — | | | — | | | 57 | | | 57 | | Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | | | — | | | — | | | 20 | | | 20 | | Operating profit before tax | | | 21,984 | | | 3,350 | | | 433 | | | 25,767 | | Income tax | | | | | | | | | | | | (4,966) | | Profit for the year | | | | | | | | | | | | 20,801 | | Profit attributable to the Parent | | | | | | | | | | | | 20,801 | | Profit attributable to non-controlling interest | | | | | | | | | | | | — | | Total assets | | | 685,590 | | | 525,722 | | | 466,901 | | | 1,678,213 | | Total liabilities | | | 726,626 | | | 604,758 | | | 183,241 | | | 1,514,625 | |
The 2022 consolidated income statement and other significant data are as follows: | | | | | | | | | | | | | | | | | | | | Global | | | | | | | | | | | Retail | | | Corporate | | | Corporate | | | | | 2022 | | | Banking | | | Banking | | | Activities | | | Total | | | | | | | | | | | | | | | | Net interest income | | | 65,477 | | | 9,216 | | | 419 | | | 75,112 | | Dividend income | | | — | | | 13 | | | 173 | | | 186 | | Income from companies accounted for using the equity method | | | — | | | — | | | 182 | | | 182 | | Net fee and commission income | | | 17,639 | | | 1,615 | | | (22) | | | 19,232 | | Gains/(losses) on financial assets and liabilities (net) | | | 1,255 | | | (138) | | | (93) | | | 1,024 | | Exchange differences (net) | | | — | | | (7) | | | — | | | (7) | | Other operating income/(expenses) | | | (2,785) | | | (557) | | | (1,134) | | | (4,476) | | Total income | | | 81,586 | | | 10,142 | | | (475) | | | 91,253 | | Administrative expenses | | | (29,151) | | | (3,846) | | | (768) | | | (33,765) | | Depreciation and amortization | | | (6,293) | | | (372) | | | (21) | | | (6,686) | | Impairment losses on financial assets not at fair value through profit or loss (net) | | | (17,323) | | | 1,240 | | | — | | | (16,083) | | Provisions (net) | | | (230) | | | (33) | | | (2,258) | | | (2,521) | | Gains/(losses) on disposal of assets not classified as non-current assets held for sale (net) | | | — | | | — | | | 4 | | | 4 | | Gains/(losses) on disposal of non-current assets not classified as discontinued operations (net) | | | — | | | — | | | 70 | | | 70 | | Operating profit before tax | | | 28,589 | | | 7,131 | | | (3,448) | | | 32,272 | | Income tax | | | | | | | | | | | | (8,164) | | Profit for the year | | | | | | | | | | | | 24,108 | | Profit attributable to the Parent | | | | | | | | | | | | 24,108 | | Profit attributable to non-controlling interest | | | | | | | | | | | | — | | Total assets | | | 754,548 | | | 656,392 | | | 402,481 | | | 1,813,421 | | Total liabilities | | | 748,904 | | | 707,728 | | | 193,335 | | | 1,649,967 | |
47. Related-party transactions Transactions with related parties The parties related to the Bank are deemed to include, in addition to its subsidiaries and associated and jointly controlled entities,entity, the Bank’s key management personnel (the member of its Board of Directors, executive officers and other key management personnel, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control. The Bank also considers the companies that are part of Banco Santander (Spain). To facilitate comprehension, the information is divided into the following categories: Ultimate Parent Company This category includes balances with Banco Santander (Spain). Santander Group Companies
This category includes all the companies that are controlled by Banco Santander (Spain) around the world, and hence, it includes the companies over which the Bank exercises any degree of control. The information related to directors, executive officers and other key management personnel is detailed in Note 5. | | | | | | | | | | | | | | | | 12/31/20192021 | | 12/31/20202022 | | | | Ultimate | | | Santander | | | Ultimate | | | Santander | | | | | Parent | | | Group | | | Parent | | | Group | | | | | Company | | | Companies | | | Company | | | Companies | | | | | | | | | | | | | | | | ASSETS: | | | | | | | | | | | | | | Financial assets at fair value through profit or loss - | | | | | | | | | | | | | | Trading derivatives - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 60,73779,660
| | | — | | | 109,65199,291
| | | — | | Banco Santander (Chile) | | | — | | | 138654
| | | — | | | 154372
| | Other
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
| Other financial assets at fair value through profit or loss -
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans and advances to credit institutions -
|
|
|
|
|
|
|
|
|
|
|
|
|
| Of which -
|
|
|
|
|
|
|
|
|
|
|
|
|
| Banco Santander, S.A. (Spain)
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
| Loans and advances to customers - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 1,915
|
|
| — | | | 1,458—
| | | 508 | | Financial assets at amortized cost - | | | | | | | | | | | | | | Loans and advances to credit institutions - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 11,3345,147
| | | — | | | 26,4155,845
| | | — | | Banco Santander (Brasil), S.A. | | | — | | | — | | | — | | | 907 | | Loans and advances to customers - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Santander Capital Structuring, S.A. de C.V. | | | — | | | 2,204
|
|
| — | | | 2,337—
| | | 224 | | SMPS Merchant Platform Solutions México, S.A de C.V | | | — | | | — | | | — | | | 84 | | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 1,687908
| | | — | | | 882—
| | Key management personnel | | | — | | | 2,9924,178
| | | — | | | 5,5074,351
| | Other intangible assets - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Santander Global Technology, S.L., Sociedad Unipersonal (formerly Produban Servicios Informáticos Generales, S.L.) | | | — | | | 809469
| | | — | | | 701143
| | Santander Back-Offices Globales Mayoristas, S.A. | | | — | | | 4 | | | — | | | 789
| | Santander Global Facilities, S.A. de C.V. | | | — | | | 7836
| | Santander Brasil Tecnologia, S.A (formerly, Isban Brasil, S.A.)
| |
| — | | | 11112
| | Other | | | — | | | 118
| | | — | | | 10 | | Other assets - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Banco Santander, Digital Assets, S.L.S.A. (Spain) | | | 8 | | | — | | | 53
|
|
| — | | | — | | Zurich Santander Seguros México, S.A. | | | — | | | 1,2781,177
| | | — | | | 1,2851,239
| | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 268 | | | — | | | — | |
| 310
|
| SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | 163184
| | | — | | | 171190
| | SMPS Merchant Platform Solutions México, S.A de C.V | | | — | | | 42 | | | — | | | 15 | | Other | | | — | | | 6530
| | | — | | | 9419
| |
| | | | | | | | | | | | | | | | 12/31/20192021 | | 12/31/20202022 | | | | Ultimate | | | Santander | | | Ultimate | | | Santander | | | | | Parent | | | Group | | | Parent | | | Group | | | | | Company | | | Companies | | | Company | | | Companies | | | | | | | | | | | | | | | | LIABILITIES AND EQUITY: | | | | | | | | | | | | | | Financial liabilities at fair value through profit or loss - | | | | | | | | | | | | | | Trading derivatives - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 51,99864,582
| | | — | | | 111,87383,133
| | | — | | Banco Santander International
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
| Other
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
| Other financial liabilities at fair value through profit or loss -
|
|
|
|
|
|
|
|
|
|
|
|
|
| Customer deposits - Repurchase agreements | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 5,0102,773
| | | — | | | 4,0653,214
| | Other | | | — | | | 18
|
|
| — | | | 53—
| | | 4 | | Financial liabilities at amortized cost - | | | | | | | | | | | | | | Deposits from credit institutions - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 10,59815,535
| | | — | | | 1,44716,896
| | | — | | Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | 7 | | | — | | | 6 | | Banco Santander (Brasil), S. A. | | | — | | | 39482
| | Santander Bank, National Association
| |
| — | | | — | |
| —
|
|
| 63
|
| Banco Santander (Brazil)
|
|
| —
|
|
| 213
|
|
| —
|
|
| 107
|
| Other
|
|
| —
|
|
| 84
|
|
| —
|
|
| 16
|
| Subordinated liabilities -
|
|
|
|
|
|
|
|
|
|
|
|
|
| Of which -
|
|
|
|
|
|
|
|
|
|
|
|
|
| Banco Santander, S.A. (Spain)
|
|
| 26,987
|
|
| —
|
|
| —
|
|
| —
|
| Customer deposits - | | | | | | | | | | | | | | Of which- | | | | | | | | | | | | | | SMPS Merchant Platform Solutions México, S.A de C.V | | | — | | | — | | | — | | | 887 | | Operadora de Carteras Gamma, S.A.P.I. de C.V. | | | — | | | 73148
| | | — | | | 99174
| | Grupo Financiero Santander México, S.A.Mercadotecnia, Ideas y Tecnología, S.A de C.V.
| | | — | | | 18
|
|
| — | | | 55—
| | | 92 | | Decarome, S.A.P.I. de C.V. | | | — | | | 70 | | | — | | | 57 | | Santander Global Facilities, S.A. de C.V. | | | — | | | 4111,780
| | | — | | | 1,4751,819
| | Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. | | | — | | | 35110
| | | — | | | 26193
| | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 445517
| | | — | | | 323112
| | Santander Capital Structuring, S.A. de C.V. | | | — | | | 217238
| | | — | | | 632223
| | Gesban México Servicios Administrativos Globales, S.A. De C.V. | | | — | | | 56 | | | — | | | 47 | | Other(*) | | | — | | | 1,0575,383
| | | — | | | 6,1872,630
| | Marketable debt securities - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 9301,011
| | | — | | | 978
|
|
| — | | | — | | Other | | | — | | | 2927
| | | — | | | 7325
| | Other financialSubordinated liabilities -
| | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 65643,693
| | | — | | | 71732,960
| | | — | | Other financial liabilities - | | | | | | | | | | | | | | Casa de BolsaOf which -
| | | | | | | | | | | | | | Banco Santander, S.A. de C.V., Grupo Financiero Santander México(Spain) | | | 1,924 | | | — | | | 901,642
| | | — | |
| 39
|
| Santander Global Facilities, S.A. de C.V. | | | — | | | 493335
| | | — | | | 542—
| | Other | | | — | | | 6113
| | | — | | | 466
| | Other liabilities - | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | Banco S3 México, S.A., Institución de Banca Múltiple
|
|
| —
|
|
| 58
|
|
| —
|
|
| 1
|
| Santander Back-offices Globales Mayorista, S.A. | | | — | | | 35 | | | — | | | 1680
| | Banco Santander (Brasil), S. A. | | | — | | | 1377
| | | — | | | 69 | | Santander Global Facilities, S.A. de C.V. | | | — | | | 18 | | | — | | | 368 | | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 972 | | | — | | | 1,1851,130
| | Other | | | — | | | 1150
| | | — | | | 82114
| |
(*) | As of December 31, 20192021 and 2020,2022, includes 9405,093 million pesos and 5,8832,267 million pesos, respectively, related to key management personnel transactions. |
| | | | | | | | | | | | | | | | | | | | | | 2018 | | | 2019 | | | 2020 | | | | | Ultimate | | | Santander | | | Ultimate | | | Santander | | | Ultimate | | | Santander | | | | | Parent | | | Group | | | Parent | | | Group | | | Parent | | | Group | | | | | Company | | | Companies | | | Company | | | Companies | | | Company | | | Companies | | | | | | | | | | | | | | | | | | | | | | INCOME STATEMENT: | | | | | | | | | | | | | | | | | | | | Interest income - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 144 | | | — | | | 22 | | | — | | | 1 | | | — | | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 107 | | | — | | | 112 | | | — | | | 84 | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 127 | | | — | | | 91 | | | — | | | 41 | | Santander Capital Structuring, S.A. de C.V. | | | — | | | 120 | | | — | | | 164 | | | — | | | 176 | | Other | | | — | | | 1 | | | — | | | 1 | | | — | | | 2 | | Interest expenses and similar charges - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 1,765 | | | — | | | 1,536 | | | — | | | 1,310 | | | — | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 1,824 | | | — | | | 669 | | | — | | | 304 | | Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | 44 | | | — | | | 37 | | | — | | | 41 | | Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. | | | — | | | 7 | | | — | | | — | | | — | | | — | | Santander Global Facilities, S.A. de C.V. | | | — | | | 32 | | | — | | | 38 | | | — | | | 52 | | Other | | | — | | | 45 | | | — | | | 39 | | | — | | | 30 | | Fee and commission income - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 6 | | | — | | | 12 | | | — | | | 8 | | | — | | Santander Investment Securities Inc. | | | — | | | 6 | | | — | | | — | | | — | | | — | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 292 | | | — | | | 115 | | | — | | | 55 | | Zurich Santander Seguros México, S.A. | | | — | | | 4,645 | | | — | | | 4,986 | | | — | | | 4,031 | | SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | 1,564 | | | — | | | 1,567 | | | — | | | 1,608 | | Other | | | — | | | — | | | — | | | 39 | | | — | | | 25 | | Fee and commission expense- | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 2 | | | — | | | 2 | | | — | | | 2 | | | — | | Santander Global Facilities, S.A. de C.V. | | | — | | | — | | | — | | | 161 | | | — | | | 135 | | Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. | | | — | | | 60 | | | — | | | 105 | | | — | | | 110 | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | — | | | — | | | 31 | | | — | | | 34 | | SAM Asset Management , S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | 16 | | | — | | | 14 | | | — | | | 17 | | Other | | | — | | | 8 | | | — | | | — | | | — | | | — | | Gains/(losses) on financial assets and liabilities (net) - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 2,145 | | | — | | | (19,135) | | | — | | | (24,086) | | | — | | Banco Santander (Chile) | | | — | | | — | | | — | | | 134 | | | — | | | (26) | | Abbey National Treasury Services plc. | | | — | | | 56 | | | — | | | — | | | — | | | — | | Other | | | — | | | 19 | | | — | | | 12 | | | — | | | (20) | | Other operating income | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Santander Global Facilities, S.A. de C.V. | | | — | | | 44 | | | — | | | 37 | | | — | | | 20 | | Santander Digital Assets, S.L. | | | — | | | — | | | — | | | 62 | | | — | | | 22 | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 113 | | | — | | | 53 | | | — | | | 55 | | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 62 | | | — | | | 69 | | | — | | | 79 | | Other | | | — | | | 29 | | | — | | | 44 | | | — | | | 37 | | | | | | | | | | | | | | | | | | | | | | Administrative expenses - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | 2020 | | | 2021 | | | 2022 | | | | | Ultimate | | | Santander | | | Ultimate | | | Santander | | | Ultimate | | | Santander | | | | | Parent | | | Group | | | Parent | | | Group | | | Parent | | | Group | | | | | Company | | | Companies | | | Company | | | Companies | | | Company | | | Companies | | | | | | | | | | | | | | | | | | | | | | INCOME STATEMENT: | | | | | | | | | | | | | | | | | | | | Interest income - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 1 | | | — | | | 2 | | | — | | | 2 | | | — | | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 84 | | | — | | | — | | | — | | | — | | Santander Global Technology, S.L. | | | — | | | — | | | — | | | 19 | | | — | | | — | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 41 | | | — | | | 21 | | | — | | | 22 | | Santander Capital Structuring, S.A. de C.V. | | | — | | | 176 | | | — | | | 123 | | | — | | | 58 | | Other | | | — | | | 2 | | | — | | | — | | | — | | | 10 | | Interest expense and similar charges - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 1,310 | | | — | | | 1,230 | | | — | | | 1,516 | | | — | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 304 | | | — | | | 146 | | | — | | | 212 | | Banco Santander International, S.A. | | | — | | | — | | | — | | | 26 | | | — | | | — | | Santander Capital Structuring, S.A. de C.V. | | | — | | | — | | | — | | | 6 | | | — | | | — | | Santander Global Technology, S.L. | | | — | | | — | | | — | | | 3 | | | — | | | — | | Operadora de Carteras Gamma, S.A.P.I. de C.V. | | | — | | | — | | | — | | | 3 | | | — | | | 10 | | Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | 41 | | | — | | | 21 | | | — | | | 25 | | Santander Global Facilities, S.A. de C.V. | | | — | | | 52 | | | — | | | 70 | | | — | | | 113 | | Other | | | — | | | 30 | | | — | | | 10 | | | — | | | 54 | | Fee and commission income - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 8 | | | — | | | — | | | — | | | — | | | — | | Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | — | | | — | | | 24 | | | — | | | 18 | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 55 | | | — | | | 142 | | | — | | | 180 | | Zurich Santander Seguros México, S.A. | | | — | | | 4,031 | | | — | | | 4,284 | | | — | | | 4,612 | | SAM Asset Management, S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | 1,608 | | | — | | | 1,742 | | | — | | | 1,895 | | Other | | | — | | | 25 | | | — | | | 1 | | | — | | | 10 | | Fee and commission expense- | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 2 | | | — | | | 2 | | | — | | | 2 | | | — | | Santander Global Facilities, S.A. de C.V. | | | — | | | 135 | | | — | | | 55 | | | — | | | — | | Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V. | | | — | | | 110 | | | — | | | — | | | — | | | — | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 34 | | | — | | | 43 | | | — | | | 57 | | SAM Asset Management , S.A. de C.V., Sociedad Operadora de Fondos de Inversión | | | — | | | 17 | | | — | | | 18 | | | — | | | 21 | | Other | | | — | | | — | | | — | | | 1 | | | — | | | 7 | | Gains/(losses) on financial assets and liabilities (net) - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | (24,086) | | | — | | | 18,441 | | | — | | | 8,610 | | | — | | Banco Santander (Chile) | | | — | | | (26) | | | — | | | 494 | | | — | | | (274) | | Banco Santander International, S. A. | | | — | | | — | | | — | | | (4) | | | — | | | (2) | | Other | | | — | | | (20) | | | — | | | — | | | — | | | — | | Other operating income | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Santander Global Facilities, S.A. de C.V. | | | — | | | 20 | | | — | | | 7 | | | — | | | — | | SMPS Merchant Platform Solutions México S.A. de C.V. | | | — | | | — | | | — | | | 42 | | | — | | | 105 | | Banco S3 México, S.A., Institución de Banca Múltiple | | | — | | | — | | | — | | | 13 | | | — | | | 17 | | Santander Digital Assets, S.L. | | | — | | | 22 | | | — | | | — | | | — | | | — | | Casa de Bolsa Santander, S.A. de C.V. | | | — | | | 55 | | | — | | | 56 | | | — | | | — | | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 79 | | | — | | | 71 | | | — | | | 78 | | Other | | | — | | | 37 | | | — | | | 7 | | | — | | | 12 | | | | | | | | | | | | | | | | | | | | | | Administrative expenses - | | | | | | | | | | | | | | | | | | | | Of which - | | | | | | | | | | | | | | | | | | | | Banco Santander, S.A. (Spain) | | | 464 | | | — | | | 524 | | | — | | | 476 | | | — | | Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.) | | | — | | | 2,875 | | | — | | | 3,328 | | | — | | | 3,307 | | Santander Global Facilities, S.A. de C.V. | | | — | | | 446 | | | — | | | 470 | | | — | | | 369 | | Gesban México Servicios Administrativos Globales, S.A. de C.V. | | | — | | | 55 | | | — | | | 58 | | | — | | | 54 | | Santander Back-offices Globales Mayorista, S.A. | | | — | | | 71 | | | — | | | 101 | | | — | | | 109 | | Santander Global Technology Chile Limitada | | | — | | | — | | | — | | | 5 | | | — | | | — | | Aquanima México, S. de R.L. de C.V. | | | — | | | 74 | | | — | | | 72 | | | — | | | 77 | | Santander Global Facilities, S.L. | | | — | | | — | | | — | | | 23 | | | — | | | 31 | | Other | | | — | | | 143 | | | — | | | 14 | | | — | | | 87 | |
F-204
Banco Santander, S.A. (Spain)
|
|
| 335
|
|
| —
|
|
| 398
|
|
| —
|
|
| 464
|
|
| —
|
| Santander Global Technology, S.L., Sociedad Unipersonal (formerly, Produban Servicios Informáticos Generales, S.L.)
|
|
| —
|
|
| 1,804
|
|
| —
|
|
| 2,147
|
|
| —
|
|
| 2,875
|
| Santander Global Facilities, S.A. de C.V.
|
|
| —
|
|
| 517
|
|
| —
|
|
| 368
|
|
| —
|
|
| 446
|
| Gesban México Servicios Administrativos Globales, S.A. de C.V.
|
|
| —
|
|
| 54
|
|
| —
|
|
| 59
|
|
| —
|
|
| 55
|
| Santander Back-offices Globales Mayorista, S.A.
|
|
| —
|
|
| 47
|
|
| —
|
|
| 49
|
|
| —
|
|
| 71
|
| Universia México, S.A. de C.V.
|
|
| —
|
|
| —
|
|
| —
|
|
| 22
|
|
| —
|
|
| —
|
| Casa de Bolsa Santander, S.A. de C.V.
|
|
| —
|
|
| 88
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
| Geoban, S.A.
|
|
| —
|
|
| 75
|
|
| —
|
|
| 60
|
|
| —
|
|
| —
|
| Aquanima México, S. de R.L. de C.V.
|
|
| —
|
|
| 53
|
|
| —
|
|
| 71
|
|
| —
|
|
| 74
|
| Servicios de Cobranza, Recuperación y Seguimiento, S.A. de C.V.
|
|
| —
|
|
| 7
|
|
| —
|
|
| —
|
|
| —
|
|
| —
|
| Other
|
|
| —
|
|
| 34
|
|
| —
|
|
| 30
|
|
| —
|
|
| 143
|
|
See Note 35 for significant transactions with related parties. 48. Risk management a) Cornerstones of the risk functionRisk principles and culture The Bank’s risk principles below are mandatory and must be followed at all times.compulsory. They take into accountcomply with regulatory requirements and are inspired by best market best practices. They are the following:practices: | 1. | A strongAll employees are risk culture (Risk Pro), as part of ‘The Santander Way’, which is followed by all employees, covers allmanagers who must understand the risks associated with their functions and promotes socially responsible managementnot assume risks with an impact that contributes toexceeds the Bank’s long-term sustainability.risk appetite or is unknown. |
| 2. | All employees are responsible for managing risk. They must be awareInvolvement of senior managers, with consistent risk management and understand,control through their conduct, actions and communications, as well as oversight of the risks generated in their day-to-day activities, avoiding risks whererisk culture and make sure the impacts are unknown or exceedBank maintain the Bank’s risk appetite limits.profile within the defined risk appetite. |
| 3. | Engagement of Bank’s Management, ensuring consistentIndependent risk management and control functions, according to the three lines of risk through their conduct, actions and communication. Bank’s Management also promotesdefense model of the risk culture and assess its degree of implementation, overseeing that the risk profile is kept within the levels defined by the Bank´s risk appetite.Bank. |
| 4. | Independence of the risk management and control functions, consistent with the three lines of defense model. |
| 5. | A forward-looking, and comprehensive approach to risk management and control acrossfor all business units of the Bankbusinesses and risk types. |
| 6.5. | Complete and timely information management, enablingto identify, assess, manage and disclose risks to be appropriately identified, assessed, managed and reported to the correspondingappropriate level. |
TheseThe Bank’s holistic control structure stands on these principles combined with a series of relevant interrelatedand includes strategic tools and processes that are embeddedset out in the Bank’s strategic planning, such as the risk appetite statement, risk profile assessment,such as annual planning and budget planning, scenario analysis, the risk reporting structure and annual planningrisk identification and budget process, among others, are the key components of the risk control framework which are essential for an adequate monitoring and oversight of the Bank’s risk profile.assessment.
Governance, policies and practices have been strengthened in response to COVID-19 pandemic. A forward-looking and comprehensive approach to1. Risk factors
The Bank's risks categorization ensures effective risk management, control and control across all business units andreporting. The risk types allows the Bank to maintain a medium-lowframework distinguishes these key risk profile, through a risk appetite defined by the Board of Directors and the identification and assessment of existing and emerging risks.
1. Main risks of the Bank’s financial instruments
The main risk categories in which the Bank has its most significant current and/or potential exposures, thus facilitating the identification thereof, includes the following:types:
| ● | Credit risk: risk ofrelates to financial loss arising from the default or credit quality deterioration of a customer or other third party,counterparty, to which the Bank has either directly provided credit or for which it has assumed a contractual obligation. |
| ● | Market risk: risk incurred as a result ofresults from changes in interest rates, exchange rates, equities, commodities and other market factors, that affectand from their effect on profit or capital. It includes the structural risk relates to market movements or balance sheets behavior will change the value or profit generation of positionsassets or liabilities in the tradingbanking book. |
| ● | Liquidity risk: risk of the Bank does not have theoccurs if liquid financial resources are insufficient or too costly to obtain in order to meet its obligationsliabilities when they fall due, or can only obtain them at high cost.due. |
| ● | Structural risk:Capital risk arisingis the risk that arises from the managementpossibility of different balance sheet items (banking book). It includes the risk of the Bank not having an adequate amountinadequate quantity or quality of capital to meet its internal business objectives, regulatory requirements or market expectations. |
| ● | Operational risk: riskexpectations in the area of loss resulting from inadequate or failed internal processes, people and systems or from external events, including conductstructural risk. |
| ● | Regulatory compliance risk: risk of non-compliance with legal and regulatory requirements as well as supervisors expectations, which may result in legal or regulatory sanctions, including fines or other financial implications. |
| ● | Model risk: risk of loss arising from inaccurate predictions, causing a sub-optimal decision, or from a model being implemented or used inappropriately. |
| ● | Reputational risk: risk of a current or potential negative economic impact to the Bank due to damage to its perception on the part of employees, customers, shareholders/investors and the wider community. |
| ● | Strategic risk: risk of loss or damage arising from strategic decisions or their poor implementation that impact the medium and long term interests of the Bank’s key stakeholders, or from an inability to adapt to external environment. |
In addition, climate-change relatedThe Bank also takes into account, on an ongoing basis in its management of the risk drivers - whether physical or transition-led - have been identifiedfunction, operational, regulatory compliance, model, reputational and strategic risks.
Additionally, environmental and climate-related risk factors are considered as factors that could aggravateimpact the existing risks in the mediummedium-to-long-term. These elements include, on the one hand, those derived from the physical effects of climate change, generated by one-off events as well as by chronic changes in the environment and, long term. The classificationon the other hand, those derived from the process of risks is criticaltransition to ensure an effective risk management and control. All identified risks should be therefore referenced to the aforementioned risk categories in order to organize their management, control and related information.a development model with lower emissions, including legislative, technological or behavior of economic agents changes.
2. Risk governance The Bank has a robust risk governance structure, aimed at ensuring the effective control of its risk profile in accordance with the risk appetite defined by the Board of Directors. The Board of Directors is responsible for approving the general framework for risk management and control, including tax risks. This governance framework is underpinned by the distribution of roles among the three lines of defense, a robust structure of committees and a strong relationship between Banco Santander México and its subsidiaries. All supported by the Bank-wide risk culture, Risk Pro.Pro.
2.1 Lines of defense The Bank follows amodel of three lines of defense modeleffectively manages and controls risks: •First line: Formed by businesses and functions that take or originate exposure to risk, it recognizes, measures, controls, monitors and reports on risks according to internal risk management regulation. Risk origination must be consistent with the approved risk appetite and related limits. •Second line: Formed by the Risk and Compliance and Conduct functions, it independently oversees and challenges the first line’s risk management. Its duties include ensuring that risks are managed according to the risk appetite defined by senior management and strengthening the risk culture throughout the Bank. •Third line: The Internal Audit function, which is independent to ensure effectivethe Board of Directors and senior managers with high-quality and efficient internal controls, governance and risk management systems, helping to safeguard our value, solvency and control:reputation. | ● | First line: Business units and all other functions that originate risks make up the first line of defense. These functions must ensure that these risks are aligned with the approved risk appetite and associated limits. Any business unit that originates risk has primary responsibility for the management of that risk. |
| ● | Second line: Risk and Compliance & Conduct functions. Their role is to provide independent oversight and challenge to the risk management activities performed by the first line of defense. These functions ensure that risks are managed in accordance with the risk appetite defined by the Board of Directors and promote a strong risk culture throughout the organization. |
| ● | Third line: The Internal Audit function, which regularly assesses policies, methodologies and procedures to ensure they are appropriate and effectively implemented for the management and control of all risks. |
The Risk, Compliance and Conduct and Internal Audit functions are separated and independent and haveindependent. Each one has direct access to the Board of Directors and its committees. 2.2 Risk committee structure The Board of Directors is ultimately responsible for risk and compliance management and controlcontrol. It revises and in particular, for approvingapproves the Bank's risk frameworks and periodically reviewing the risk appetite, and the risk framework, as well as forwhile promoting a strong risk culture across the whole organization. In order to conduct these tasks, theBank. The Board of Directors has the support of different committees, this is the case of the comprehensiverelies on its risk managementsupervision, regulation and compliance committee for risk control and on the Bank’s executive committee for risk committee, which have specific risk related responsibilities.approval. The Bank’s Chief Risk Officer (CRO) who decides risk strategy and promotes proper risk culture, is responsible for the oversightin charge of overseeing all risks and for challenging and advising business lines on risk management. The Bank’s Chief Compliance Officer (CCO) who decides compliance and conduct strategy, is in charge of controlling the business unitsrisks within their purview and must provide the Bank CRO with a complete overview on how they managethe situation of risks withbeing monitored. Both the Bank´s CRO and CCO have direct access, and reportingreport to the comprehensive risk managementsupervision, regulation and compliance committee as well as toand the Board of Directors. Other bodies that make up the highest level ofThe executive risk, governance, with authoritiesrisk control and compliance and conduct committees are executive committees and have been delegated powers by the Board of Directors, are the executive risk committee and the comprehensive risk management committee, details of which are provided below:
Executive risk committee
This committee is responsible for risk management, within the authorities delegated by the Board of Directors. The committee makes risks taking decisions at the highest level, ensuring that they are within the established risk appetite limits for the Bank.
The CEO chairs this committee and it is composed of nominated executive officers and other Bank’s senior management members. Risk, Finance and Compliance and Conduct functions, among others, are represented. The CRO has the power of veto over the committee’s decisions.
Comprehensive risk management committee
This committee is responsible for risk control, determining whether the risks originated by the business units are managed within the Bank’s risk appetite limits and providing a holistic view of all risks. This includes the identification and monitoring of both current and emerging risks, and evaluating their impact on the Bank's risk profile.
This committee is chaired by the CRO
Risk functions have forums and it is composed of senior management members from the Risk, Compliance & Conduct, Finance, Accounting and Management Control functions are represented among others. Additionally, each risk factor has its own fora, and/or regular meetings to manage and control the risks under their scope. Among others, they have the following responsibilities:Their responsibilities include:
| -• | AdviceReporting to the Bank’s CRO, the Bank’s CCO, the risk control committee and the comprehensivecompliance and conduct committee on risk management committee that risks are being managed in accordance with the Bank’saccording to risk appetite.appetite; |
| -• | Carry out regular monitoringMonitoring and ensuring proper management of each risk factor.factor; and |
| -• | Oversee theOverseeing measures adopted to comply with the expectations of the supervisors and internal and external auditors.auditors' expectations. |
For certain matters,In order to establish an appropriate control environment in the management of each of the risk factors, the Risk and Compliance and Conduct functions have effective internal regulations that allow them to carry out adequate risk management and control.
General compliance committee The committee is responsible for reviewing significant compliance and conduct risk events, and evaluating related measures. It devises and assesses corrective actions for compliance risks owing to shortcomings in management and control or new risks. This committee is chaired by the CCO and it is composed of senior management from the Compliance & Conduct, Risk, Accounting and Management functions. The committee chair has a casting vote over committee resolutions. The Bank may set up additional governance for special cases. Amid the COVID-19 pandemic, coordination and communication are essential to making sure the Bank´s actions are effective, underpinned by written communication, meetings, reporting and enhanced governance The Bank monitored the pandemic intensively through special situation forums such as the credit risk war room, in addition to the Bank´s regular governance framework. In order to steer and supervise the review process of the IBOR Reform, the Bank may establish specificestablished the IBOR steering group. This group is responsible for driving the project's strategic direction and take the required decisions to ensure a correct transition across all the Bank’s business units. The IBOR steering group operates in accordance with the methodology defined by the Bank's Execution Project Office and is chaired by the project's sponsor, the head of Santander Corporate & Investment Banking (SCIB), with the additional governance. For example:support of eight senior executives. | ● | In order to steer and supervise the review process of the IBOR Reform, the Bank established the IBOR steering group. This group is responsible for driving the project's strategic direction and take the required decisions to ensure a correct transition across all the Bank’s business units. The IBOR steering group operates in accordance with the methodology defined by the Bank's Execution Project Office and is chaired by the project's sponsor, the head of Santander Corporate & Investment Banking (SCIB), with the additional support of eight senior executives. |
3. Management processes and tools To ensure that anThe Bank has these effective risk management processes and control is carried out, the Bank has defined several key processes that rely on a series of tools, which are described as follows:tools:
3.1 Risk appetite and structure of limits The Bank definesRisk appetite is the risk appetite as the amountvolume and type of risks that are considereddeemed prudent to assume for implementing the business strategy so thatof the Bank, can maintain its ordinary activity in the event ofeven under unexpected circumstances. When establishing the risk appetite,It considers adverse scenarios that could have a negative impact on capital and liquidity, profitability and/or the share price are taken into account.price.
The risk appetite statement (RAS) is annually set by the Board of Directors for the Bank. Every business unit sets their own risk appetite on an annual basis, aligned and embedded within the Bank’s consolidated statement. The Board of Directors is responsible for approving the respective risk appetite proposals. The Bank’s statement is then further cascaded down in the formF-190
3.1.1 Business model and policies by risk type, portfolio and activity segment. Risk appetite principlesfundamentals
The following principles governBank's risk appetite is consistent with the Bank’s risk appetite:culture and its unique business model built on customer focus, scale and diversification. At the core of the Bank´s risk appetite are: | ● | Responsibility of the Board of DirectorsA medium-low and of Bank’s Management. The Board of Directorspredictable target risk profile that is responsible for setting the risk appetitecentered on retail and for monitoring compliance with its requirements.commercial banking, internationally diversified operations and strong market share; |
| ● | Holistic risk view (enterprise wide risk), risk profile backtestingStable, recurrent earnings and challenge. The risk appetite must consider all significant risksshareholder remuneration, sustained by sound capital, liquidity and facilitate an aggregate viewsources of the risk profile with the use of quantitative metrics and qualitative indicators. |
| ● | Forward-looking view. The risk appetite must consider the desirable risk profile for the short and medium term, taking into account both the most plausible circumstances and adverse/stress scenarios.funding; |
| ● | EmbeddingAn independent risk function with active senior management that embeds a strong risk culture and alignment with strategic and business plans. The risk appetite is an integral part of the strategic and business planning, which is embedded in the daily management by cascading down the aggregated limits to those set at portfolio level, business unit or business line, as well as through the key risk appetite processes.drives a sustainable return on capital; |
| ● | Coherence across the various business unitsA global, holistic view through a meticulous control and a common risk language throughout the Bank. Each business unit’s risk appetite must be coherent with thatmonitoring of the Bank.risks, businesses and markets; |
| ● | Periodic review, backtestingA focus on products the Bank knows well; |
| ● | A conduct model that protects the Bank's customers; and adoption |
| ● | A remuneration policy that reconciles employees and executives' interests to risk appetite and long-term results. |
3.1.2 Risk appetite principles The principles informing the Bank´s risk appetite are: | ● | The Board of Directors and Bank’s Management responsibility for risk appetite; |
| ● | An enterprise-wide view of risk, back-testing and challenge of risk profile based on quantitative metrics and qualitative indicators; |
| ● | Forward-looking view based on plausible assumptions and adverse/stress scenarios to reflect the desired risk profile in the short and medium term; |
| ● | Strategic and business plans embedded in daily management by polices and limits; |
| ● | Common standards that align with Banco Santander (Spain); and |
| ● | Regular reviews, best practicespractice and regulatory requirements. Monitoring and controlrequirements with mechanisms are establishedin place to ensurekeep the risk profile is maintained,stable and the necessary corrective and mitigating actions are taken in the event ofmitigate non-compliance. |
Limits structure,3.1.3 Structure of limits, monitoring and control
Risk appetite is expressed throughin qualitative statementsterms and quantitative limits structured aroundon these five main axes:core elements. • Results volatility:
- Maximum loss that the Bank is willing to accept under a scenario ofcan tolerate in an acute stress.stress scenario. • Solvency
- Minimum capital position that the Bank is willing to accept under a scenariocan tolerate in an acute stress scenario. - Maximum leverage that the Bank is willing to accept under a scenario ofcan tolerate in an acute stress.stress scenario. • Liquidity
- Minimum structural liquidity position. - Minimum liquidity horizon position that the Bank is willing to accept under a scenario of acute stress. - Minimum liquidity coverage position. • Concentration:
- Concentration in single names, sectors and portfolios. - Concentration in non-investment grade counterparties. - Concentration in large exposures. • Non-financial risks
- Qualitative non-financial risk indicators:
• Fraud.
• Technological.
• Security and cyber-risk.
• Reputational.
• Others.
- Maximum operational risk losses. - Maximum risk profile. Compliance with- Non-financial risk appetite limits is regularly monitored. Specialized control functions report the appropriateness of the risk profile to the Board of Directorsindicators:
• Financial crime compliance (FCC). • Cyber and its committees on a monthly basis.security risk. Linkage between the risk appetite limits and those of the business units and portfolios is a key element for making the risk appetite an effective risk management tool. The management policies and structure of limits used to manage the different categories and types of risk are directly related to the principles and limits defined in the risk appetite statement.• Model risk.
3.2 Risk profile assessment (RPA)• Reputational risk.
The Bank carries out identification and assessment tests of the different risks it is exposed to, involving the different lines of defense, establishing management standards that not only meet regulatory requirements but also reflect best practices in the market, and reinforce the Bank’s risk culture.
The results of these risk identification and assessment (RIA) exercises are integrated to evaluate the Bank’s risk profile through the risk profile assessment (RPA). This exercise analyzes the development of risks and identifies areas for improvement:
| ● | Risk performance, enabling the understanding of residual risk-by-risk type through a set of metrics and indicators calibrated using international standards. |
| ● | Control environment assessment, measuring the degree of implementation of the target-operating model, as part of the advanced risk management of the Bank. |
| ● | Forward-looking analysis, based on stress metrics and identification and/or assessment of the main threats to the strategic plan (Top risks), enabling specific action plans to be put in place to mitigate potential impacts and their monitoring. |
3.3 Scenario analysis
Another fundamental tool that is used by the Bank to ensure an effective risk management and control is the analysis of potential impacts triggered by different scenarios related to the environment in which the Bank operates. These scenarios are expressed in terms of both macroeconomic variables, as well as other variables that may affect the Bank’s risk profile.
This is usually known as “scenario analysis”, which is a robust and useful tool for management at all levels. It enables the Bank to assess its resilience under stressed conditions and the identification of possible mitigating actions to be implemented in case the projected scenarios start to materialize. Its ultimate objective is to reinforce the stability of income, capital and liquidity.
In this respect, the role of the Research and Public Policy area in terms of the generation of the different scenarios as well as the strict governance and control processes that these exercises are subject to, including their analysis and review by the Bank’s Management, including Internal Audit, are fundamental to ensure their quality.
The robustness and consistency of the scenario analysis exercises are therefore based on the following pillars:
| ● | Development and integration of models that estimate the future performance of metrics, such as credit losses, based on historic information that can be internal to the Bank and/or external from the market, as well as on simulation techniques. |
| ● | Challenge and backtesting of model results to ensure their quality. |
| ● | Inclusion of expert judgment and deep knowledge of the Bank’s different portfolios. |
| ● | Robust governance of the whole process, covering models, scenarios, assumptions and results rationale, as well as their impact in terms of management actions to be taken. |
Applications of scenario analysis
Scenario analysis is included in the Bank’s risk framework, ensuring that any impact affecting its solvency or liquidity can be rapidly identified and addressed. With this objective in mind, a systematic review of the exposure to different types of risks is included, not only under the baseline scenario but also under various simulated adverse scenarios.
The Bank has a map of uses in place to strengthen their alignment across the different risk types, and to facilitate the continuous improvement of such uses. An additional fundamental goal is to reinforce the integration and synergies between the different regulatory and internal exercises.
Scenario analysis forms an integral part of several key processes of the Bank:
| ● | Regulatory uses: stress test scenarios using the guidelines set by the various regulators that supervise the Bank. |
| ● | Internal capital adequacy assessment (ICAAP) and liquidity assessment (ILAAP) in which, while the regulators define certain requirements, the Bank develops its own methodology to assess its capital and liquidity levels under different stress scenarios to support planning and the effective management of these two critical aspects. |
| ● | Risk appetite. This includes stressed metrics for which the Bank defines maximum levels of losses (or minimum liquidity levels) that should not be exceeded. These exercises are related to those conducted for capital and liquidity, although they have different frequencies and present different granularity levels. |
| ● | Climate change scenario analysis: the objective is to provide a scenario-based assessment of those risks and opportunities related to climate change. |
| ● | Recurrent risk management in different processes/exercises: |
| - | Budget and strategic planning process, in the development of commercial risk approval policies, in the risk assessment for Bank’s Management or in specific analysis regarding the activity profile or portfolios. |
| - | Identification of Top risks based on a systematic process to identify and assess all risks to which the Bank is exposed. These Top risks are selected and a macroeconomic or idiosyncratic scenario is associated with each one, to assess their impact on the Bank. |
| - | Recovery plan that is drawn annually to establish the tools available to the Bank to survive in the event of an extremely severe financial crisis. The plan sets out a series of financial and macroeconomic stress scenarios, with differing degrees of severity, which include idiosyncratic and/or systemic events. |
3.4 Risk Reporting Structure (RRS)
The reporting model of the Bank continues to be enhanced after the simplification and optimization of processes, the quality controls implemented and the strengthening of the effective communication to Bank’s Management. Furthermore, the overall view of all risks has been consolidated, based on complete, precise and recurring information allowing the Bank’s Management to assess the risk profile and decide accordingly.
The risk reporting of the Bank taxonomy contains three types of reports that are released on a monthly basis: the Bank’s risk report (which is distributed to the Bank’s Management), the risk reports of each business unit and the reports of each of the risk factors identified in the Bank’s risk framework.
This taxonomy is characterized by the following:
| ● | All risk factors included in the Bank’s risk framework are covered. |
| ● | Balance between data, analysis and qualitative comments is maintained throughout the reports, including forward-looking measures, risk appetite information, limits and emerging risks. |
| ● | The holistic view is combined with a deeper analysis of each risk factor. |
| ● | A homogenous structure and criteria. Therefore, a consolidated view is provided to enable the analysis of all risks based on common definitions. |
| ● | All the metrics reported follow risk data aggregation (RDA) criteria, ensuring the quality and consistency of the data included in all risk reports. |
b) Credit risk 1. Introduction to the credit risk treatment Credit risk is defined as the risk thatrefers to a potential financial loss will be incurred arising from the default or credit quality deterioration of a customer or other third party with whom the Bank has assumed a contractual obligation, including providingobligation. It is the most important risk, both in terms of exposure and capital consumption. It also includes counterparty risk, country risk and sovereign risk. Credit risk management The Bank identifies, analyses, controls and decides on credit that may therefore not be fulfilled.risk based on a holistic view of the credit risk cycle, which includes the transaction, the customer and the portfolio. Credit risk identification is key to managing and controlling the Bank's portfolios effectively. The Bank classifies external and internal risks in each business and adopts corrective and mitigating measures when needed through these processes:
1.1 Planning The Bank's planning helps to achieve business objectives and define specific action plans within the Bank's risk appetite framework. Strategic commercial plans (SCP) are a management and control tool defined by the Business and Risk areas for the Bank's credit portfolios. They determine commercial strategies, risk policies, resources and infrastructure, ensuring a holistic view of the portfolios. They provide managers with an updated view of credit portfolio quality to measure credit risk, run internal controls over the defined strategy coupled with regular monitoring, detect significant deviations in risk and potential impacts, and take corrective actions when necessary. They also align with the Bank's risk appetite capital targets. 1.2. Risk assessment and credit rating To analyze customers’ ability to meet contractual obligations, the Bank uses valuation and parameter estimation models in each of the segments. The Bank's credit quality valuation models are based on credit rating drivers, which are monitored to calibrate and adjust the decisions and ratings they assign. Depending on each segment, drivers can be: | ● | Rating: resulting from the application of mathematical algorithms that have a quantitative model based on balance sheet ratios or macroeconomic variables, and a qualitative module supplemented by the credit analyst’s expert judgment. It is used for Santander Corporate and Investment Banking, corporate, institutional and small and medium-sized enterprises segments (with individualized treatment). |
| ● | Scoring: an automatic assessment system for credit applications. It automatically assigns an individual score to each credit. A behavior score is also calculated and updated monthly to assess customer’s behavior and therefore, with other variables, determine the credit expected loss, generally in the retail and small and medium-sized enterprises segments. |
The Bank's parameter estimation models follow econometric models built on the Bank's portfolios' historical defaults and losses and uses them to calculate economic and regulatory capital as well as IFRS 9 allowance for impairment losses for each portfolio. The Bank regularly monitoring and evaluates models' appropriateness, predictive capacity, performance, granularity, compliance with policies and other related factors. The Bank reviews ratings with the latest available financial and economic information. The Bank has also increased the reviews for customers who are under closer observation or have automatic warnings in the risk management systems. 1.3. Credit risk mitigation techniques Risk approval criteria are generally based on the borrowers’ ability to pay in fulfilment of financial obligations, notwithstanding any additional collateral or personal guarantees the Bank can require from them. To determine this, the Bank analyzes funds or net cash flows from their businesses or income with no guarantors or the assets pledged as collateral. The Bank always considers guarantors and collateral when deciding to approve a loan as a secondary means of recourse if the first channel fails. In general, a guarantee is as a reinforcement measure added to a credit transaction to mitigate a loss due to a failure to meet a payment obligation. The Bank has credit risk mitigation techniques for various types of customer and products. Some are for specific transactions (e.g., property) while others apply to a series of transactions (e.g., derivatives netting and collateral). 1.4. Definition of limits, pre-classifications and pre-approvals The Bank uses strategic commercial plans to manage credit portfolios, defining limits for each of them and for new originations, in line with the Bank´s credit risk appetite and its target risk profile. Transposing the Bank´s risk appetite to portfolio management strengthens controls over the Bank´s credit portfolios. The Bank´s limits, pre-classifications and pre-approvals processes determine the risk that the Bank can assume with each customer. The Business and Risk areas set risk limits that are approved by the executive risk committee (or delegated committees) and should reflect a transaction’s expected risk return. The Bank applies various limits models to each segment: | ● | Large corporate are subject to a pre-classification model based on a system for measuring and monitoring economic capital. Pre-classification models express the level of risk the Bank is willing to assume in transactions with customers/groups in terms of capital at risk, nominal cap and maximum tenors. To manage limits with financial entities, the Bank uses Credit Equivalent Risk (CER), which includes actual and expected risks with customers according to risk appetite and credit policies. |
| ● | Corporates and institutions that meet certain requirements (strong relationships, rating, etc.): The Bank uses simpler pre-classification model with an internal limit. It establishes a reference point in a customer's level of risk based on repayment capacity, overall indebtedness and a pool of banks. |
Transactions with large corporates, corporates and institutions above certain limits or with special characteristics could require approval from a senior credit analyst or a committee. | ● | For individual customers and small and medium-sized enterprises with low turnover, the Bank manages large volumes of credit transactions with automatic decision models to classify customers and transactions. |
1.5. Scenario analysis Scenario analysis is used in loan portfolio management as an evolution of the portfolio analysis. It enriches the understanding of the portfolio performance under different macroeconomic conditions, and allows management strategies to be anticipated and defined in order to avoid future deviations from the established plans and targets. The approach taken with regard to scenario analysis consists of simulating the impact of alternative scenarios in the portfolio credit parameters (PD, LGD) and the associated expected credit losses. The results of this analysis are compared with the portfolio’s credit profile indicators to identify the most appropriate measures that could be developed to guide the required management actions. Scenario analysis is integrated into credit management portfolio activities and in the strategic commercial plans. 1.6. Monitoring Regularly monitoring business performance and comparing it to pre-defined plans is key to the Bank’s risk management. The Bank holistic monitoring of customers helps early detection of impacts on risk performance and credit quality. The Bank assigns customers a monitoring classification with a pre-defined course of action and ad hoc measures to correct any deviations. Monitoring, which considers transaction forecasts and characteristics, in addition to changes in classification, is performed by risk teams supported by the Internal Audit unit and is based on customer segmentation: | ● | In the Santander Corporate and Investment Banking segment, monitoring, in the first instance, is a direct function of both the business manager and the risk analyst, who maintain the direct relationship with the customer and manage the portfolio. This guarantees an up-to-date view of the customers’ credit quality is always available and allows the Bank to anticipate situations of concern and take the necessary actions. |
| ● | For corporates, institutions and small and medium-sized enterprises with a credit analyst assigned, the function consists of identifying and tracking customers that require closer monitoring, reviewing ratings and continuously analyzing relevant indicators. |
| ● | For Santander Corporate and Investment Banking, corporate and institutions segments, the Bank performs the monitoring process through the Santander Customer Assessment Note (SCAN), which was implemented in the Bank since 2020 |
| ● | The Bank’s SCAN system aims to establish the level of monitoring, policies and specific actions for all individual customers, based on their credit quality and particular circumstances. Each customer is assigned a level of monitoring, and specific risk management actions, on a dynamic basis, with a specific manager appointed and agreed monitoring frequency. |
| ● | For individual customers, businesses and smaller small and medium-sized enterprises monitoring is carried out through automatic alerts, in order to detect shifts in the performance of the portfolio. |
In addition to customer credit quality monitoring, the Bank establishes the control procedures needed to analyze portfolios and performance, as well as any possible deviations regarding planning or approved alert levels. Portfolio analysis systematically controls the evolution of credit risk with regard to budgets, limits and benchmarks, assessing the impacts of future situations, both exogenous and resulting from strategic decisions, to establish actions to keep the risk portfolio profile and volumes within the parameters set by the Bank within its risk appetite. 1.7. Recovery and collections management The Collections and Recoveries area carries out recoveries, which are important to risk management. It defines an enterprise-wide management strategy with guidelines and general lines of action for the Bank based on the economic environment business model and other recovery conditions. Recovery management follows regulatory requirements set out on the management of non-performing and forborne exposures. In addition, the Bank applies specific policies on recovery management that include the principles of the different strategies. The Collections and Recoveries areas directly manages customers, where value creation is based on effective and efficient collection management. New digital channels are becoming increasingly important in recovery management. The diverse features of Bank’s customers make segmentation necessary in order to manage recoveries adequately. Mass management of large groups of customers with similar profiles and products is conducted through processes with a high technological and digital component, while personalized management focuses on customers who, because of their profile, require a specific manager and a more customized management. Recovery management is divided into four phases: in arrears, non-performing loans recoveries, write-offs recoveries and management of foreclosed assets. The management scope for the Recovery function includes non-productive assets (NPA), corresponding to the forborne portfolios, non-performing loans, written-off loans and foreclosed assets, where the Bank may use mechanisms to rapidly reduce the volume of these assets, such as the sale of portfolios or foreclosed assets. In the written-off loans category, debt instruments are included (past due or otherwise) the recovery of which, after an individualized analysis, is considered remote, due to the severe and unrecoverable impairment of the solvency of the transaction or the customer. Classification in this category involves full cancellation of the gross carrying amount of the loan and its derecognition, which does not mean that the Bank interrupts negotiations and legal proceedings to recover the amounts. 1.8 Forborne loan portfolio Forbearance is defined as the modification of the payment conditions of a transaction that allow a customer who is experiencing financial difficulties (current or foreseeable), to fulfil their payment obligations. The Bank follows rigorous criteria for the evaluation, classification and monitoring of such transactions, ensuring the strictest possible care and diligence in their approval and monitoring. Therefore, the forbearance transaction must be focused on recovery of the amounts due and the payment obligations adapted to the customer's current position and, in addition, losses must be recognized as soon as possible if any amounts are deemed irrecoverable. Forbearance is never used to delay the immediate recognition of losses or to hinder the appropriate recognition of risk of default. Further, the Bank defines the classification criteria for forborne transactions in order to ensure that any risks are suitably recognized, bearing in mind that they must remain classified as non-performing or watch list for an appropriate period to ensure reasonable certainty that repayment capacity can be recovered. Certain information regarding the forborne loan portfolio is included in Note 11.f. 1.9 Credit risk metrics Loans and advances to customers increased 0.9% year-on-year. Non-performing loans amounted to 21,203 million pesos as of December 31, 2022, a 6% decrease compared to December 31, 2021. As of December 31, 2022, the non-performing loans ratio was 2.5%, a decrease of 2 basis points compared to December 31, 2021. As of December 31, 2022, the allowance for loan losses amounted to 21,652 million pesos, 3% higher than at the end of 2021, mainly explained by the recovery in the different loan portfolios. As of December 31, 2022, the Bank recognized in the consolidated income statement an amount of 16,100 million pesos of impairment losses on financial assets, 16.37% less than in the year 2021. Regarding credit risks, the main indicators are also continuously monitored and maintain a robust credit quality supported by mitigation measures and volume increases. 2. Main aggregates and variations Following are the main aggregates relating to credit risk from the Bank’s activities with customers: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans to customers
(million pesos) | Non-performing loans
(million pesos) | Percentage of non-performing loans by type of customer | | | | 2018 | | | 2019 | | | 2020 | | | 2018 | | | 2019 | | | 2020 | | | 2018 | | | 2019 | | | 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | By loan type: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Public Sector | | | 59,547 | | | 70,450 | | | 73,016 | | | — | | | — | | | — | | | — | | | — | | | — | | Commercial, financial and industrial | | | 371,976 | | | 379,758 | | | 346,075 | | | 6,538 | | | 5,815 | | | 6,530 | | | 1.8% | | | 1.5% | | | 1.9% | | Mortgage | | | 145,749 | | | 156,209 | | | 177,665 | | | 8,345 | | | 8,399 | | | 9,847 | | | 5.7% | | | 5.4% | | | 5.5% | | Installment loans to individuals | | | 111,787 | | | 118,099 | | | 116,227 | | | 3,546 | | | 3,738 | | | 5,532 | | | 3.2% | | | 3.2% | | | 4.8% | | Revolving consumer credit card loans | | | 56,227 | | | 59,477 | | | 53,809 | | | 1,716 | | | 1,717 | | | 2,543 | | | 3.1% | | | 2.9% | | | 4.7% | | Non revolving consumer loans | | | 55,560 | | | 58,622 | | | 62,418 | | | 1,830 | | | 2,021 | | | 2,989 | | | 3.3% | | | 3.4% | | | 4.8% | | | | | 689,059 | | | 724,516 | | | 712,983 | | | 18,429 | | | 17,952 | | | 21,909 | | | 2.7% | | | 2.5% | | | 3.1% | |
Information on the allowance for impairment losses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans to customers
(million pesos) | Non-performing loans
(million pesos) | Percentage of non-performing loans by type of customer | | | | 2020 | | | 2021 | | | 2022 | | | 2020 | | | 2021 | | | 2022 | | | 2020 | | | 2021 | | | 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | By loan type: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Public Sector | | | 73,016 | | | 85,256 | | | 52,094 | | | — | | | — | | | — | | | — | | | — | | | — | | Commercial, financial and industrial | | | 346,075 | | | 354,554 | | | 393,612 | | | 6,530 | | | 9,937 | | | 5,587 | | | 1.9% | | | 2.8% | | | 1.4% | | Mortgage | | | 177,665 | | | 199,579 | | | 205,242 | | | 9,847 | | | 9,725 | | | 11,867 | | | 5.5% | | | 4.9% | | | 5.8% | | Installment loans to individuals | | | 116,227 | | | 122,699 | | | 147,217 | | | 5,532 | | | 2,991 | | | 3,749 | | | 4.8% | | | 2.4% | | | 2.5% | | Revolving consumer credit card loans | | | 53,809 | | | 53,417 | | | 63,782 | | | 2,543 | | | 1,328 | | | 1,175 | | | 4.7% | | | 2.5% | | | 1.8% | | Non revolving consumer loans | | | 62,418 | | | 69,282 | | | 83,435 | | | 2,989 | | | 1,663 | | | 2,574 | | | 4.8% | | | 2.4% | | | 3.1% | | | | | 712,983 | | | 762,088 | | | 798,165 | | | 21,909 | | | 22,653 | | | 21,203 | | | 3.1% | | | 3.0% | | | 2.7% | |
The Bank estimates the allowance for impairment losses by calculating the expected credit loss at twelve months or for the entire life of the transaction, based on the stage in which each financial asset is classified in accordance with IFRS 9.
Details on the allowance for impairment losses are presented in Note 11.d.
Regarding the evolution of the allowance for impairment losses, the Bank monitors them by carrying out sensitivity analyses on the main variables that have an impact on the financial assets distribution in the different stages and calculating the allowance for impairment losses and updates it, based on macroeconomic scenarios.
Additionally, based on similar macroeconomic scenarios, the Bank also performs stress tests and sensitivity analysis in a regular basis, such as ICAAP, strategic plans, budgets and recovery and resolution plans. In this sense, a prospective view of the sensitivity of each of the Bank’s loan portfolio is created in relation to the possible deviation from the base scenario, considering both the macroeconomic developments in different scenarios and the three-year evolution of the business. These tests include potentially adverse and favorable scenarios.
The transactions classification into the different IFRS 9 stages is carried out in accordance with the regulation through the risk management policies of the Bank, which are consistent with the generally accepted principles across the industry. In order to determine the classification in Stage 2, the Bank assesses whether there has been a significant increase in credit risk since the initial recognition of the transactions, considering a series of common principles throughout the Bank that guarantee that all financial instruments are subject to this assessment, which considers the particularities of each portfolio and type of product on the basis of various quantitative and qualitative indicators. Furthermore, transactions are subject to the expert judgment of the analysts, who set the thresholds under an effective integration in management. All is implemented according to the approved governance.
The establishment of judgments and criteria thresholds used by the Bank are based on a series of principles, and develop a set of techniques. The principles are as follows:
| ● | Universality: all financial instruments subject to a credit rating must be assessed for their possible significant increase in credit risk. |
| ● | Proportionality: the definition of the significant increase in credit risk must take into account the particularities of each portfolio. |
| ● | Materiality: its implementation must be also consistent with the relevance of each portfolio so as not to incur in unnecessary costs or efforts. |
| ● | Holistic vision: the approach selected must be a combination of the most relevant credit risk aspects (e.g. quantitative and qualitative). |
| ● | Application of IFRS 9: the approach must take into consideration IFRS 9 characteristics, focusing on a comparison with credit risk at initial recognition, as well as considering forward-looking information. |
| ● | Risk management integration: the criteria must be consistent with those metrics considered in the day-today risk management. |
| ● | Documentation: Appropriate documentation must be prepared. |
The techniques are summarized below:
| ● | Stability of Stage 2: in the absence of significant changes in the portfolios credit quality, the volume of assets in Stage 2 should maintain a certain stability as a whole. |
| ● | Economic reasonableness: at transaction level, Stage 2 is expected to be a transitional rating for exposures that could eventually move to a deteriorating credit status at some point or Stage 3, as well as for exposures that have suffered credit deterioration and whose credit quality is improving. |
| ● | Predictive power: it is expected that the significant increase in credit risk’s definition avoid, as fast as possible, direct migrations from Stage 1 to Stage 3 without having been previously classified in Stage 2. |
| ● | Time in Stage 2: it is expected that the exposures do not remain categorized as Stage 2 for an excessive time. |
The application of the aforementioned techniques, conclude in the setting of one or several thresholds for each portfolio. Likewise, these thresholds are subject to a regular review by means of calibration tests, which may entail updating the thresholds types or their values.
3. Other credit risk aspects 3.1 Credit risk by activity in the financial markets This section covers credit risk generated in treasury activities with customers, mainly with credit institutions. Transactions are undertaken through money market financial products with different financial institutions and through counterparty risk products, which serve the needs of the Bank’s customers. Counterparty credit risk is the risk that the customer in a transaction could default before the definitive settlement of the cash flows of the transaction. It includes the following types of transactions: financial derivative instruments, transactions with repurchase agreement, stock lending, transactions with deferred settlement and financing of guarantees. There are two methodologies for measuring this exposure: (i) mark-to-market (MtM) methodology (replacement value of financial derivatives) plus potential future exposure (add-on) and (ii) the calculation of exposure using Montecarlo simulation for some products. The capital at risk or unexpected loss is also
calculated, i.e., the loss which, once the expected loss has been subtracted, constitutes the economic capital, net of guarantees and recoveries.recoveries, and expected loss. After the markets close, exposures are re-calculated by adjusting all transactions to their new time frame, adjusting the potential future exposure and applying mitigation measures (netting, collateral, etc.), so that the exposures can be controlled directly against the limits approved by the Bank’s Management. Risk control is performed through an integrated system and in real time, enabling the exposure limit available with any counterparty, product and maturity to be known at any time. 3.2 Concentration risk Concentration risk control is a vital part of management. The Bank continuously monitors the degree of concentration of its credit risk portfolios using various criteria: geographical areas, economic sectors, products and groups of customers. The Board of Directors, via the risk appetite framework, determines the maximum levels of concentration. In line with these maximum levels and limits, the executive risk committee establishes the risk policies and reviews the appropriate exposure levels for the effective management of the degree of concentration in the Bank’s credit risk portfolios. The concentration risk is subject to CNBV regulations on “Large Exposures” as follows: | a) | As of December 31, 20192021 and 2020,2022, there is no financing granted to debtors or groups of individuals or entities representing a joint risk in an amount that exceeds 40% of the Bank’s Basic Capital (of the quarter immediately preceding the reporting date). |
| b) | As of December 31, 2019,2022, there are two loans granted to debtors (the first of 66,520 million pesos and the second of 25,103 million pesos) representing individually an amount greater than 10% of the Bank’s Basic Capital (of the quarter immediately preceding the reporting date). The first one is granted to Santander Consumo, a subsidiary of the Bank, and it was eliminated for consolidation purposes in these consolidated financial statements. |
| c) | As of December 31, 2021, assets and liabilities transactions with the three main debtors or groups of individuals representing a joint risk for the aggregate amount of 40,93544,816 million pesos andthat represent 40.84%31.56% of the Bank’s Basic Capital. |
| c) | As of December 31, 2020, there are two loans granted to debtors (the first of 38,000 million pesos and the second of 20,047 million pesos) representing individually an amount greater than 10% of the Bank’s Basic Capital (of the quarter immediately preceding the reporting date). |
| d) | As of December 31, 2020,2022, assets and liabilities transactions with the three main debtors or groups of individuals representing a joint risk for the aggregate amount of 40,95546,826 million pesos andthat represent 36.59%40.80% of the Bank’s Basic Capital. |
Resolutions and provisions issued by the CNBV to address the COVID-19 pandemic
On April 8, 2020, the CNBV issued some resolutions and provisions to face the contingency derived from the COVID-19 pandemic. In this sense, the CNBV, approved temporary amendments to the General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) regarding “Large Exposures”.
The amendment regarding lending transactions diversification, in order to implement the international standard known as “Large Exposures” (Grandes Exposiciones), currently under public consultation on the webpage of the National Commission for Regulatory Improvement (Comisión Nacional de Mejora Regulatoria), which limits systemically important global banks (G-SIB) on exposures to counterparties or groups of counterparties connected by control business ties, or by the existence of an economic dependency between them. As a measure to encourage credit flow, the aforementioned standard for banks of local systemic importance will enter into force on January 1, 2021 (instead of October 1, 2020 as originally established), keeping the terms applicable to the rest of the banks.
Higher-Risk Loans The Bank does not have any significant exposure to higher-risk loans. The loan portfolio is focused on retail banking with a medium-low risk profile and with broad diversification by segment. 64.3%48% of the BankBank´s net customer loans are secured, mostly by real estate collateral. Mortgages to individuals represent approximately 25%24% of the BankBank´s net customer loans, with a low risk profile, low non-performing loans ratios and an adequate coverage ratio. Among other factors, this is due to the fact that these loans are mainly first residence mortgages and subject to a rigorous assessment of credit risk and affordability. The admission process assesses both the current and future payment capacity of the customer, evaluating if the customer’s disposable income will most likely be enough to meet the loans’ instalments. Certain mortgage portfolios that may present higher risks than others (interest only, flexible loans, loans with loan-to-value greater than 100%, buy to let), are subject to even more strict lending policies to mitigate their risks. Furthermore, they represent a low percentage of the BankBank´s loan portfolio, and their performance is continuously monitored to ensure an adequate control. 3.3 Sovereign risk and exposure to other public sector entities Sovereign risk is the risk contracted in transactions with the Central Bank (including the regulatory cash reserve requirement – compulsory deposits), issuer risk from public debt portfolio and the risk arising from transactions with public institutions with the following features: their funds only come from the state’s budgeted income and the activities are of a non-commercial nature. The Bank’s sovereign exposure is mostly in pesos. This exposure is recognized in the consolidated balance sheet and concentrated 53%46% in short and medium-term maturities. Over the past few years, total exposure to sovereign risk has remained aligned with the regulatory requirements and strategic reasons that support the management of this portfolio. Regarding the deterioration measurement of these exposures, the Bank has evaluated methodologies and criteria in accordance with the IFRS 9 general criteria, integrating common processes, systems, tools and data that are used both for accounting purposes and for capital adequacy. When estimating the expected losses, the Bank applies its own credit risk models for the valuation of financial instruments belonging to Santander Corporate & Investment Banking portfolios.
Regarding the methodology and parameters development for this segment, it should be noted that the PD model incorporates forward-looking information as well as the current credit quality indicator (rating). As for the LGD, two approaches are given depending on the existence of guarantees. The LGD secured approach (severity based on guarantees) is based on the estimate made by analysts and aligned with the general framework proposed for individualized analysis by discounting cash flows. In the case of unsecured LGD (estimated severity without guarantee base), due to the low number of observations collected in recent decades, aligned with the general framework proposed for individualized analysis by discounting cash flows.
In case of sovereign risk, the few default cases existing over the last decades only reflect the possibility of a potential unexpected loss that, due to its scarcity, cannot be modelled. Consequently, for this type of sovereign risk, the expected loss is considered irrelevant in consistency with unexpected loss.
4. Credit risk management
The credit risk management process consists of identifying, analyzing, controlling and deciding on the credit risk incurred by the Bank. It considers a holistic view of the credit risk cycle including transaction, customer and portfolio views. Both business units and risk areas, together with the Bank’s Management participate in the management process and control process.
Credit risk identification is a key component for the active management and effective control of the Bank’s portfolios. The identification and classification of external and internal risks in each business unit allows corrective and mitigating measures to be adopted in the event they are needed. This is achieved through the following processes:
4.1 Planning
Planning allows business targets to be set and specific action plans defined, within the risk appetite framework established by the Bank.
Strategic commercial plans (SCP) are one of the Bank’s management and control tools for the Bank’s loan portfolio. The SCP are prepared jointly by the business units and risks areas, and define the commercial strategies, risk policies and measures and infrastructures required. These factors are considered as a whole, ensuring a holistic view of the portfolios.
The integration of SCP at management level provides an updated view of the loan portfolio quality, enabling credit risk to be measured, and internal controls executed alongside the periodic monitoring of strategy, the early detection of deviations and significant changes in the risk and potential impact, as well as defining corrective actions where necessary.
SCP are approved and monitored by the Bank’s Management.
The SCP are aligned with the Bank´s risk appetite and the capital objectives of the Bank.
4.2 Risk assessment and credit rating process
In order to analyze a customer’s capacity to meet their contractual commitments, the Bank uses valuation and parameter estimation models in each of the segments where it operates.
The credit quality valuation models applied are based on credit rating drivers, which are monitored and controlled to calibrate and adjust the decisions and ratings they assign. Depending on the segment, drivers may be:
| ● | Rating: resulting from the application of mathematical algorithms incorporating a quantitative model based on balance sheet ratios or macroeconomic variables, and a qualitative module supplemented by the credit analyst’s expert judgment. Used for the Santander Corporate and Investment Banking, corporates and institutions segments. |
| ● | Scoring: an automatic assessment system for credit applications. It automatically assigns an individual score to each credit. A behavior score is also calculated and updated monthly to assess customer’s behavior and therefore, with other variables, determine the credit expected loss, generally in the retail and SME segments. |
Parameter estimation models are obtained through internal econometric models based on the portfolios’ historical defaults and losses for which they are developed: They are also used to calculate economic and regulatory capital and the IFRS 9 allowance for impairment losses.
Periodic model monitoring and evaluation is carried out, assessing among other factors, the appropriateness of usage, predictive capacity, performance and granularity. In addition, policy compliance is also monitored.
The resulting ratings are regularly reviewed, incorporating the latest available financial information as well as other relevant data. The depth and frequency of the reviews are increased in the case of customers who require a more detailed monitoring or have automatic warnings in the risk management systems.
4.3 Credit risk mitigation techniques
Generally, from a risk acceptance standpoint, the criteria are linked to the borrower’s payment capacity for the financial obligations - although this does not inhibit imply an impediment to requiring collateral or personal guarantees in addition.
Payment capacity is assessed based on the funds or net cash flows from the customer´s businesses or income, excluding guarantors or assets pledged as collateral. These guarantors or assets are always to be considered, when evaluating the approval of the transaction, as a secondary method of recovery in the event the first channel fails.
In general, a guarantee is defined as a reinforcement measure added to a credit transaction with the purpose of mitigating the loss due to a breach of the payment obligation.
The Bank applies several credit risk mitigation techniques on the basis, among other factors, of the type of customer and product. Some are inherent to specific transactions (e.g. real estate guarantees) while others apply to a series of transactions (e.g. financial derivatives netting and collateral). The different mitigation techniques can be grouped into personal guarantees, financial guarantees or collateral.
4.4 Definition of limits, pre-classifications and pre-approvals
The connection between the Bank’s credit risk appetite and loan portfolio management and control is implemented through the SCP, which define the portfolio and origination limits to predict the portfolio’s risk profile. The cascading down of the Bank’s risk appetite strengthens the controls over loan portfolio.
The Bank has processes that determine the risk that the Bank is able to assume with each customer. These limits are jointly set by the business units and risk areas and have to be approved by the executive risk committee and reflect the expected results of the business in terms of risk-return.
There are different limit models depending on the segment:
| ● | Large corporate groups: The Bank uses a pre-classification model based on a system for measuring and monitoring economic capital. The result is the level of risk that the Bank is willing to assume with a customer/group, in terms of capital at risk, nominal cap, and maximum tenors according to the type of transaction, in the case of financial entities, limits are managed through Equivalent Credit Risk. It includes the actual and expected risk with a customer within the limits defined in the risk appetite statement and credit policies. |
| ● | Corporates and institutions that meet certain requirements (Strong relationships, rating, etc.): The Bank uses a more simplified pre-classification model with an internal limit that establishes a reference point in the level of risk to be assumed with the customer. The criteria will include, among others, repayment capacity, overall indebtedness and the distribution of banking pool. |
In both cases, transactions over certain thresholds or with specific characteristics might require the approval of a senior credit analyst or committee.
| ● | For individual customers and SME with low turnover, large volumes of credit transactions are managed with the use of automatic decision models to classify the customer/transaction. |
4.5 Scenario analysis
Scenario analysis is used in loan portfolio management as an evolution of the portfolio analysis. It enriches the understanding of the portfolio performance under different macroeconomic conditions, and allows management strategies to be anticipated and defined in order to avoid future deviations from the established plans and targets.
The approach taken with regard to scenario analysis consists of simulating the impact of alternative scenarios in the portfolio credit parameters (PD, LGD) and the associated expected credit losses. The results of this analysis are compared with the portfolio’s credit profile indicators to identify the most appropriate measures that could be developed to guide the required management actions.
Scenario analysis is integrated into credit management portfolio activities and in the SCP.
4.6 Monitoring
Business performance is monitored on a regular basis by comparing performance with established plans. This is a key risk management activity.
All customers are monitored on an ongoing, holistic manner that enables the early detection of events that may have an impact on the customer’s credit rating. Monitoring is carried out through an ongoing review of all customers, assigning a monitoring classification, establishing pre-defined actions associated to each classification and executing specific measures (pre-defined or ad-hoc) to correct any deviations that could have a negative effect for the Bank.
This monitoring process takes into consideration the transaction forecasts and characteristics throughout its entire life. It also takes into consideration any variations that may have occurred in the classification and suitability since the time of the review.
The risk teams, backed up by Internal Audit, carry out monitoring. It is based on customer segmentation:
| ● | In the Santander Corporate and Investment Banking segment, monitoring, in the first instance, is a direct function of both the business manager and the risk analyst, who maintain the direct relationship with the customer and manage the portfolio. This guarantees an up-to-date view of the customers’ credit quality is always available and allows the Bank to anticipate situations of concern and take the necessary actions. |
| ● | For corporates, institutions and SME with a credit analyst assigned, the function consists of identifying and tracking customers that require closer monitoring, reviewing ratings and continuously analyzing relevant indicators. |
| ● | For Santander Corporate and Investment Banking, corporates and institutions segments, the Bank performs the monitoring process through the Santander Customer Assessment Note (SCAN), which was implemented in the Bank since 2019 |
| ● | The Bank’s SCAN system aims to establish the level of monitoring, policies and specific actions for all individual customers, based on their credit quality and particular circumstances. Each customer is assigned a level of monitoring, and specific risk management actions, on a dynamic basis, with a specific manager appointed and agreed monitoring frequency. |
| ● | For individual customers, businesses and smaller SME monitoring is carried out through automatic alerts, in order to detect shifts in the performance of the portfolio. |
In addition to customer credit quality monitoring, the Bank establishes the control procedures needed to analyze portfolios and performance, as well as any possible deviations regarding planning or approved alert levels.
Portfolio analysis systematically controls the evolution of credit risk with regard to budgets, limits and benchmarks, assessing the impacts of future situations, both exogenous and resulting from strategic decisions, to establish actions to keep the risk portfolio profile and volumes within the parameters set by the Bank within its risk appetite.
4.7 Recovery and collections management
Recovery activity is a significant element in the Bank’s risk management and control. This function is carried out by the Recoveries area, which defines a strategy and an enterprise-wide focus for recovery management.
The Bank has a recovery management-operating model that sets the guidelines and general policies of action to be applied, taking always into account the particularities that the recovery activity requires, such as economic environment, business model or a mixture of both.
The Recoveries area directly manages customers, where value creation is based on effective and efficient collection management. New digital channels are becoming increasingly important in recovery management
The diverse features of Bank’s customers make segmentation necessary in order to manage recoveries adequately. Mass management of large groups of customers with similar profiles and products is conducted through processes with a high technological and digital component, while personalized management focuses on customers who, because of their profile, require a specific manager and a more customized management.
Recovery management is divided into four phases: in arrears, non-performing loans recoveries, write-offs recoveries and management of foreclosed assets.
The management scope for the Recovery function includes non-productive assets (NPA), corresponding to the forborne portfolios, non-performing loans, written-off loans and foreclosed assets, where the Bank may use mechanisms to rapidly reduce the volume of these assets, such as the sale of portfolios or foreclosed assets.
In the written-off loans category, debt instruments are included (past due or otherwise) the recovery of which, after an individualized analysis, is considered remote, due to the severe and unrecoverable impairment of the solvency of the transaction or the customer. Classification in this category involves full cancellation of the gross carrying amount of the loan and its derecognition, which does not mean that the Bank interrupts negotiations and legal proceedings to recover the amounts.
4.8 Forborne loan portfolio
Forbearance is defined as the modification of the payment conditions of a transaction that allow a customer who is experiencing financial difficulties (current or foreseeable), to fulfil their payment obligations.
The Bank follows rigorous criteria for the evaluation, classification and monitoring of such transactions, ensuring the strictest possible care and diligence in their approval and monitoring. Therefore, the forbearance transaction must be focused on recovery of the amounts due and the payment obligations
adapted to the customer's current position and, in addition, losses must be recognized as soon as possible if any amounts are deemed irrecoverable.
Forbearance is never used to delay the immediate recognition of losses or to hinder the appropriate recognition of risk of default.
Further, the Bank defines the classification criteria for forborne transactions in order to ensure that any risks are suitably recognized, bearing in mind that they must remain classified as non-performing or watchlist for an appropriate period to ensure reasonable certainty that repayment capacity can be recovered.
Certain information regarding the forborne loan portfolio is included in Note 11.f.
4.9 Credit risk metrics
Loans and advances to customers decreased 1.6% year-on-year.
Non-performing loans amounted to 21,909 million pesos as of December 31, 2020, a 22% increase compared to December 31, 2019.
As of December 31, 2020, the non-performing loans ratio was 3.1%, an increase of 60 basis points comparing to December 31, 2019. This is explained by loan growth and containment of our customers’ credit quality deterioration through the application of the Support Program.
As of December 31, 2020, the allowance for loan losses amounted to 25,551 million pesos, 16% higher than at the end of 2019, mainly explained by:
| ● | Deterioration in the different loan portfolios. This has not significantly materialized due to the Support Program and relief measures that have been implemented by the Bank. |
| ● | Additional IFRS 9 expected credit losses raised reflecting the forward-looking view, based on a long-term approach, taken into account by regulators and supervisors, to the potential macroeconomic scenarios in the COVID-19 pandemic context. |
| ● | Collective and individual assessment to reflect expected credit losses for financial assets where credit risk is deemed to have increased. In particular, the Bank is continuously monitoring the sectors that have been most affected by the financial impacts of the COVID-19 pandemic. |
It should also be noted that 1,458 million pesos of post-model adjustments or overlays was recognized as of December 31, 2020.
As of December 31, 2020, the Bank recognized in the consolidated income statement an amount of 21,799 million pesos of impairment losses on financial assets, 13.4% more than in the year 2019. Additionally a loss on modification of financial assets of 1,743 million pesos was recognized in the consolidated income statement as a result of remeasurement of loans in the Support Program according to IFRS 9.
The Bank took into account the recommendations provided by the IASB and other regulators and supervisors concerning the classification (staging) of loans subject to the Support Program. Accordingly, Support Program is not considered an automatic indicator for identifying these contractual modifications as a default, nor for classifying them as Stage 2.
However, this does not exempt the rigorous application of IFRS 9 in the monitoring of customer’s credit quality and, using individual or collective assessment techniques, the timely detection of significant increases in credit risk in certain transactions or groups of transactions. As such, the macroeconomic
deterioration caused by the COVID-19 pandemic has led to a Stage 2 classification of 70,531 million pesos of financial assets.
Regarding credit risks, the main indicators are also continuously monitored and maintain a robust credit quality supported by mitigation measures and volume increases.
c) Trading market risk, structural and liquidity risk 1. Activities subject to market risk and types of market risk The perimeter of activities subjectActivities exposed to market risk encompasses thoseencompass transactions where risk is assumed as a resultconsequence of potential variations in market factors. Thus, they include trading risks and structural risks, which are also affected by market shifts. This risk arises from changes in risk factors - interest rates, inflation rates, exchange rates, stock prices, credit spreads, commodity prices, volatility and other market factors; the volatility of each of these elements - as well as liquidity risk from the variousBank’s products and markets, in whichand the Bank operatesbalance-sheet liquidity risk. Therefore, they include trading risks and balance sheet liquidity risk:structural risks:
| ● | Interest rate risk arises from the possibility that changesmovements in interest rates could adversely affectthat reduce the value of a financial instrument, a portfolio or the Bank as a whole. It affectscan affect loans, deposits, debt securities, most assets and liabilities in the trading books and financial derivatives, among others. |
| ● | Inflation rate risk originatesarises from potential changesmovements in inflation rates could adversely affectthat can reduce the value of a financial instrument, a portfolio or the Bank as a whole. It affectscan affect instruments such as loans, debt securities and financial derivatives, where the return is linked to future inflation values or to a change in the current rate. |
| ● | Exchange rate risk is defined as the sensitivity to potential movements in exchange ratespossibility of a position’s value that is denominated in aloss because the currency other than the base currency. Hence,of a long or open position in a foreign currency may produce a loss if that currency depreciateswill depreciate against the base currency. Among the exposures affected by this risk are the Bank’s transactions in foreign currency. |
| ● | Equity risk is the sensitivitypossibility of the value ofloss from open positions in equities to adverse movements insecurities if their market pricesprice or expected future dividends expectations. Among others, thisfall. It affects positions in shares, stock market indices, convertible bonds and financial derivatives with shares as the underlying asset (put, call, equity swaps, among others)others.). |
| ● | Credit spread risk is the sensitivitypossibility of the value ofloss from open positions in fixed incomefixed-income securities to movements inor credit spread curvesderivatives if their yield curve, or inthe recovery rates associated with specific issuers and typesrate of debt. Thetheir issuer or type change. A spread is the yield difference between financial instruments withagainst a quoted margin over other benchmark instruments, mainly(e.g. the internal rate of return (IRR) of government bonds and interbank interest rates. |
| ● | Volatility risk is sensitivity of the value of a portfolio to changes in the volatility of risk factors: interest rates, exchange rates, shares and credit spreads. All financial instruments incur this risk where volatility is a variable in the valuation model. The most significant case is financial options portfolios. |
All these market risks can be partly or fully mitigated by using financial derivatives such as options, futures, forwards and swaps.
In addition, other types of market risk require more complex hedging. For example:
| ● | Correlation risk is the sensitivity of the portfolio to changes in the relationship between risk factors (correlation), of either the same type (for example, two exchange rates) or different types (e.g. an interest rate and the price of a commodity). |
| ● | Market liquidity risk arises when the Bank as a whole cannot reverse or close a position in time without having an impact on the market price or the transaction cost. Market liquidity risk can be caused by a reduction in the number of market makers or institutional investors, the execution of a large volume of transactions, or market instability. Additionally, this risk could increase depending on how the different exposures are distributed among certain products and currencies. |
| ● | Pre-payment or cancellation risk. Some on-balance sheet instruments (such as mortgages or deposits) may have associated options that allow the holder to buy, sell or otherwise alter its future cash flows. This may result in mismatches arising in the balance sheet, which may pose a risk since cash flows may have to be reinvested at an interest rate that is potentially lower (assets) or higher (liabilities). |
| ● | UnderwritingVolatility risk is the consequencepossibility of an entity’s involvementloss caused by movements in interest rates, exchange rates, the underwriting or placement of securities orstock market, credit spreads and other types of debt, when the entity assumes the risk of havingfactors affecting portfolio value. It is inherent to acquire partially the issued securities when potential buyers have not taken up the placement in full by potential buyers.all financial instruments whose value considers volatility (especially options contracts) |
In addition to the aboveFinancial derivative contracts (such as options, futures, forwards and swaps) can mitigate market risks balancepartially or fully.
Additionally, other more complex hedging market risks are considered, such as correlation risk, market liquidity risk, prepayment or cancellation risk, and underwriting risk. Balance sheet liquidity risk must also be considered. Unlike(unlike market liquidity risk, balance sheet liquidity riskrisk) is defined as the possibility of not meetingloss caused by forced disposal of assets or cash flow imbalance if the Bank meets its payment obligations on time,late or doing so at excessive cost. Among theIt can cause losses caused by this risk are losses due to forced asset sales of assets or margin impacts on margins due to the mismatch between expected cash inflows and outflows. Pension and actuarial risks also depend on market variables. 2. Trading market risk management Management limits and control system Market risk functions monitor market risk positions on a daily basis to ensure that they remain within the approved management limits. In addition, daily monitoring is performed to assess the performance of market risk metrics and any major changes. Periodic reports are produced and distributed based on this assessment to ensure the proper monitoring of market risk activities within the Bank and to inform the Bank’s Management and other internal and external stakeholders. Setting the aforementioned trading market risk limits is a dynamic process, which is determined by the Bank’s predefined risk appetite levels. This process is part of the annual limits plan that is fostered by the Bank’s Management. The market risk limits are established based on different metrics and are intended to cover all activities subject to market risk from many perspectives, applying a prudent approach. The main ones are: | ● | Value at Risk (VaR) and Stressed VaR limits. |
| ● | Limits of equivalent and/or nominal positions. |
| ● | Interest rate sensitivity limits. |
| ● | Delivery risk limits for short positions in securities (fixed income and securities). |
| ● | Limits to constrain the volume of effective losses or protect results generated during the period: |
| - | Jump to default by issuer limit. |
| - | Jump to default by issuer limit. |
| ● | Limits for origination transactions. |
These general limits are complemented by other sub-limits to establish a sufficiently granular structure that allows for effective control of the market risk factors to which the Bank is exposed in its trading activities. Positions are monitored on a daily basis at the trading desk level with an exhaustive control of those changes observed in both portfolios and trading desks, to identify any potential events that might need immediate correction, and thus comply with the Section 619 of the Dodd-Frank Act (Volcker Rule). The limits are established based on the scope of approval and control. The limits are requested by the business executive, considering the particular nature of the business and the established budget targets, seeking consistency between the limits and the risk/return ratio. The limits are approved by the corresponding risk bodies as defined in their governance process. Business units must comply with the approved limits at all times. In the event of a limit being breached, the business executives have to explain, in writing and on the same day, the reasons for the excess and the action plan to correct the situation, which in general could consist of reducing the position until it reaches the defined limits or setting out the strategy that justifies a limit increase. Methodologies a) Value at Risk The standard methodology applied in the Bank for risk management and control purposes related to its trading activities is Value at Risk (VaR), which measures the maximum expected loss with a certain confidence level and period. The standard for historic simulation is a confidence level of 99% and a one-day period. Statistical adjustments are applied enabling the most recent developments affecting the levels of risk assumed to be incorporated efficiently and on a timely manner. A period of two years or at least 520 days from the reference date of the VaR calculation is used. Two figures are calculated every day: one applying an exponential decay factor that accords less weight to the observations furthest away in time and another with the same weight for all observations. The higher of the two is reported. Simultaneously the Value at Earnings (VaE) is calculated, which measures the maximum potential gain with a certain level of confidence and specific period, applying the same methodology as for VaR. b) Stressed VaR (sVaR) In addition to standard VaR, Stressed VaR (sVaR) is calculated daily for the main portfolios. The calculation methodology is the same as for VaR, with the two following exceptions: | ● | The historical observation period for the factors: when calculating stressed VaR a window of 260 observations is used, rather than 520 for VaR. However, this is not the most recent data: instead, the data used is from a continuous period of stress for the portfolio in question. This is calculated for each major portfolio by analyzing the history of a subset of market risk factors selected based on expert judgment and the most significant positions in the books. |
| ● | Unlike VaR, stressed VaR is obtained using the percentile with uniform weighting, not the higher of the percentiles with exponential and uniform weightings. |
c) Gauging and backtesting measures Regulation establishes that the VaR model should accurately capture all material risks. Given that Value at Risk uses statistical techniques under normal conditions, for a certain confidence level and for a defined time horizon, the maximum potential loss estimated can differ from real losses. Therefore, the Bank regularly analyzes and contrasts the accuracy of the VaR calculation model to confirm its reliability. Backtesting is designed to assess the general quality or effectiveness of the risk measurement model by comparing the VaR (Value at Risk) measures with Profit and Loss (P&L) results. The Bank performs a Theoretical P&L backtesting analysis, which is calculated using the market risk calculation engine, without taking into account intra-day results, changes in portfolio positions or the passage of time (Theta). This P&L is used exclusively to test the quality of the VaR model. Regulatory backtesting is performed on a daily basis at least at the overall portfolio unit level and one portfolio level below. Internal (not regulatory) backtesting exercises are performed daily, weekly or monthly based on its granularity of the portfolio level considered. The number (or proportion) of over shootings registered is one of the most intuitive indicators in order to establish the goodness of fit of a model. Regulatory backtesting is calculated for a historic period of one year (250 days) and at a VaR confidence level of 99%. Between two and three over shootings per year are expected. For Theoretical P&L backtesting and for the total portfolio, the results are as follows: In 2018, there were two exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2020, there were one VaE break (i.e., days when the daily gain exceeded VaE). In 2019, there were one exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2019, there were one VaE break (i.e., days when the daily gain exceeded VaE).
In 2020, there were two exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2020, there were one Value at Earnings (VaE) break (i.e., days when the daily gain exceeded VaE).
In 2021, there was one exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2021, there were four VaE break (i.e., days when the daily gain exceeded VaE). In 2022, there was one exception to 99% VaR (i.e., days when the daily loss exceeded VaR). During 2022, there was one VaE breaks (i.e., days when the daily gain exceeded VaE). The number of exceptions is consistent with the assumptions specified in the VaR calculation model. d) Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA) The Bank incorporates CVA and DVA when calculating the trading portfolio results. The CVA is a valuation adjustment for OTC financial derivatives, resulting from the risk associated with the credit exposure assumed with each counterparty. It is calculated taking into account the potential exposures with each counterparty at each future maturity. The CVA for a particular counterparty is the sum of the CVA for all its maturities. To calculate this metric, the following inputs are considered: expected exposure, loss given default, probability of default and a discount factor curve. Debit valuation adjustment (DVA) is a valuation adjustment similar to the CVA, but in this case because of the BankBank’s risk that ourthe counterparties assume in OTC financial derivatives.
3. Trading market risk key metrics VaR analysis During the year, the Bank continued its strategy of focusing its trading activity on customer business, minimizing, where possible, exposure to directional risk in net terms and maintaining its diversification by risk factor. The average daily Total VaR of the Bank’s market trading operations in 2018 stood at 122 million pesos, higher than that for 2017 at 95 million pesos. In 2018, the changes in VaR were due mainly to changes in the interest rate risk factor as a result of the trading book’s strategy. VaR modeling did not change during 2018. At the end of December 2018, VaR stood at 69 million pesos.
Average daily Total VaR increased by 27 million pesos with respect to 2017. This increment was concentrated in interest rate VaR, where the average daily increased from 96 million pesos to 110 million pesos. The average daily equity VaR and exchange rate VaR increased from 5 million pesos to 6 million pesos and decreased from 51 million pesos to 48 million pesos, respectively.
The risk assumption profile, in terms of VaR and results, showed that VaR during 2018 remained at levels below the limit of 256 million pesos. During the first semester of 2018, the average daily total VaR was 123 million pesos and during the second semester of 2018, the average daily Total VaR was 121 million pesos. VaR stayed in levels between 69 million pesos and 398 million pesos in the second semester, as a result of interest rates increase expectation.
The average daily Total VaR of the Bank’s market trading operations in 2019 stood at 66 million pesos, lower than that for 2018 at 122 million pesos. In 2019, the changes in VaR were due mainly to changes in the interest rate risk factor and foreign exchange risk factor as a result of the trading book’s strategy. VaR modeling did not change during 2019. At the end of December 2019, VaR stood at 74 million pesos.
Average daily Total VaR decreased by 55 million pesos with respect to 2018. This decrement was concentrated in interest rate VaR, where the average daily decreased from 110 million pesos to 43 million pesos. The average daily equity VaR and exchange rate VaR decreased from 6 million pesos to 3 million pesos and decreased from 48 million pesos to 41 million pesos, respectively.
The risk assumption profile, in terms of VaR and results, showed that VaR during 2019 remained at levels below the limit of 301 million pesos. During the first semester of 2019, the average daily total VaR was 57 million pesos and during the second semester of 2019, the average daily Total VaR was 75 million pesos. VaR stayed in levels between 42 million pesos and 101 million pesos in the second semester, as a result of interest rates decrease expectation and volatility in the movements at foreign exchange risk factor.
The average daily Total VaR of the Bank’s market trading operations in 2020 stood at 165 million pesos, higher than that for 2019 at 66 million pesos. In 2020, the changes in VaR were due mainly to changes in the interest rate risk factor as a result of the trading book’s strategy. VaR modeling did not change during 2020. At the end of December 2020, VaR stood at 74 million pesos. Average daily Total VaR increased by 99 million pesos with respect to 2019. This increment was concentrated in interest rate VaR, where the average daily increased from 43 million pesos to 86 million pesos. The average daily equity VaR and exchange rate VaR increased from 3 million pesos to 5 million pesos and 41 million pesos to 127 million pesos, respectively. The risk assumption profile, in terms of VaR and results, showed that the levels of VaR for the majority ofduring 2020 remained below at levels below the limit of 277 million pesos. During the first semester of 2020, the average daily total VaR was 181 million pesos,pesos. VaR stayed in levels ofbetween 55 million pesos and 378 million
pesos. This pesos.This was a result of great uncertainty and high volatility in local and global markets due to the COVID-19 pandemic.
During the second semester of 2020,2021, the average daily Total of VaR was 150 million pesos. VaR stayed in levels between 70 million pesos and 207 million pesos in the second semester, as a result of lower volatility observed in the different risk factors (foreign exchange and interest rates). The reduction in volatility was because the participants in the market, reducing the uncertainty and effects that it would cause on different markets, could assimilate the impact of the COVID-19 pandemic. The average daily Total VaR of the Bank’s market trading operations in 2021 stood at 50 million pesos, lower than that for 2020 at 165 million pesos. In 2021, the changes in VaR were due mainly to changes in the interest rate risk factor and foreign exchange risk factor as a result of the trading book’s strategy. VaR modeling did not change during 2021. At the end of December 2021, VaR stood at 41 million pesos. Average daily Total VaR decreased by 115 million pesos with respect to 2020. This decrement was concentrated in interest rate VaR, where the average daily decreased from 86 million pesos to 51 million pesos. The average daily equity VaR and exchange rate VaR decreased from 5 million pesos to 2 million pesos, and 127 million pesos to 14 million pesos, respectively. The risk assumption profile, in terms of VaR and results, showed that the levels of VaR for the majority of 2021 remained at levels below the limit of 239 million pesos. During the first semester of 2021, the average daily total VaR was 54 million pesos and during the second semester of 2021, the average daily Total VaR was 46 million pesos, VaR stayed in levels between 24 million pesos and 85 pesos. in the second semester, as a result of interest rates increase expectation and volatility in the movements at foreign exchange risk factor. The average daily Total VaR of the Bank’s market trading operations in 2022 stood at 41 million pesos, lower than that for 2021 at 50 million pesos. In 2022, the changes in VaR were due mainly to changes in the interest rate risk factor as a result of the trading book’s strategy. VaR modeling did not change during 2022. At the end of December 2022, VaR stood at 41 million pesos. Average daily Total VaR decreased by 9 million pesos with respect to 2021. This decrement was concentrated in interest rate VaR, where the average daily decreased from 51 million pesos to 38 million pesos. The average daily equity VaR and exchange rate VaR decreased from 2 million pesos to 1 million pesos, and 14 million pesos to 15 million pesos, respectively. The risk assumption profile, in terms of VaR and results, showed that the levels of VaR for the majority of 2022 remained below at levels below the limit of 208 million pesos. During the first semester of 2022, the average daily total VaR was 43 million pesos. VaR stayed in levels between 26 y 103 million pesos as a result of the interest rates increase expectations and foreign exchange volatility. VaR volatility is derived from the Russian – Ukraine conflict. During the second semester of 2022, the Mexican Central Bank aggressively increased the interest rates to target the high inflation levels and did not lower the interest rates levels for the remainder of 2022. As a result, the average daily total VaR was 38 million pesos, VaR stayed in levels between 25 million pesos and 57 million pesos. Financial derivatives risk management The Bank’s financial derivatives activity is mainly focused on the sale of investment products and hedging risks for customers. Risk management is focused on ensuring that the net open risk is the lowest possible. These transactions include options on equities, fixed income and exchange rates. Exposures related to complex structured assets The Bank does not have exposure to instruments or complex structured assets, a management culture for which prudence in risk management is one of its hallmarks in risk management. The Bank’s policy for approving new transactions involving complex structures remains very prudent and conservative. It is subject to strict supervision by the Bank’s Management. Before approving a new transaction, product or underlying asset, the CRO verifies: | - | The existence of an appropriate valuation model to monitor the value of each exposure: mark-to-market, mark-to-model or mark-to-liquidity. |
| - | The availability in the market of observable data (inputs) needed to be able to apply this valuation model. |
In addition, provided these two conditions be met: | - | The availability of adequate systems, duly adapted to calculate and monitor every day the results, positions and risks of new transactions. |
| - | The degree of liquidity of the product or underlying asset, in order to make possible their coverage when deemed appropriate. |
Scenario analysis
Various stress scenarios were calculated and analyzed regularly in 2020 (at least monthly) for all the trading portfolios and using the same risk factor assumptions.
Probable scenario
This scenario was defined based on movements derived from a standard deviation, with respect to risk factors that have an influence on the valuation of financial instruments included in our trading book for each period. The movements applied to each risk factor were as follows:
●Interest rate (IR), volatility (Vol) and Exchange rate (FX) risk factors were increased by one standard deviation.
| ● | Equity risk factors (EQ) were decreased by one standard deviation. |
Possible Scenario
Under this scenario, risk factors were modified by 25%. In summary, the movements applied to each risk factor were as follows:
| ● | Risk factors: IR, Vol and FX were multiplied by 1.25 (they were increased by 25%). |
| ● | Risk factors EQ were multiplied by 0.75 (they were decreased by 25%). |
Remote Scenario
Under this scenario, risk factors were modified by 50%. In summary, the modifications applied to each risk factor were as follows:
| ● | Risk factors IR, Vol and FX were multiplied by 1.50 (i.e., they were increased by 50%). |
| ● | Risk factors EQ were multiplied by 0.5 (i.e., they were decreased by 50%). |
4. Structural balance sheet risk management Management of structural liquidity Structural liquidity management aims to finance the Bank’s recurring activity in optimum conditions of maturity and cost and avoid assuming undesired liquidity risks. Given the retail nature of the Bank, branches have continued taking deposits following the selective financing strategy of the Bank considering their costs. Notwithstanding the aforementioned, the Bank has maintained frequent issuance activity in the wholesale funding markets during 20202022 in order to continue strengthening their liquidity position and presence in the markets, taking advantage of favorable market conditions that existed prior to the WHO declaration of global COVID-19 pandemic and later on, once debt markets were gradually reopened. The Bank issued during 2020, 75,928 million pesos of medium- and long-term issues and USD 4,590 million.markets.
All these actions have contributed to strengthen the Bank’s balance sheet and helped to maintain an appropriate liquidity position. The main aspects in relation to structural management of liquidity during 20202022 were: | ● | Adequate position of structural liquidity. The Bank is essentially a retail bank. Therefore, customer deposits are the main source of funds in the financing structure. These deposits, together with debt instruments, enable the Bank to address most of its liquidity needs. |
| ● | High capacity to obtain liquidity on the balance sheet. The reserve includes deposits in the Central Banks and cash, unencumbered sovereign debt, undrawn credit lines granted by the Central Bank, as well as other assets eligible as collateral and other undrawn credit lines in development banks), all of which reinforce the solid liquidity position of the Bank. |
The Bank exhibits both Liquidity Coverage Ratio (LCR) well above the 100% regulatory limit and a Net Stable Funding Ratio (NSFR) also well above 100%. | ● | Access to wholesale markets for liquidity based on short and long-term ratings. |
| ● | Moderate use of assets as security for structural balance-sheet funding sources that has increased since the end of 2019, remaining still at limited levels, as a consequence of the utilization of the Central Bank’ program put in place to prevent further damages on economic activity resulting from COVID-19 pandemic.sources. |
The Bank performs a continuous internal process to ensure the adequacy of both, its liquidity position and the management, measurement, monitoring and control of its liquidity risk (Internal Liquidity Adequacy and Assessment Process - ILAAP). All these processes, which are forward-looking and integrated into the decision-making and management process, risk management and risk appetite, liquidity planning and overall strategy, have the ultimate objective of ensuring that the Bank has and will have adequate liquidity resources to meet their obligations under both normal and stressed conditions and over an appropriate set of time horizons, taking into account all material sources of liquidity risk. Limits management and control systems The policies of senior management dictate mechanisms to monitor and control structural risk control and oversight mechanisms are defined in the policies set by the Bank’s Management, taking into account theaccording to regulatory requirements established by regulators and the Bank’s risk appetite statement. These controlappetite. The mechanisms consider the differentsub-types of structural risk sub-types, as well as theand their implications, contingencies and interrelations among them.interrelations. The main function of structural riskStructural Risk function’s role in the second line of defense is the measurement, analysis and control of metrics to ensure that the level of balance sheet structural risk is aligned with approved policies, limitsrisks are understood, controlled and the Bank’s risk appetite. In particular:reported to senior management according to established governance: | ●o | Monthly calculation, analysisIt sets interest rate risk metrics and monitoringreviews and challenges structural risk appetite and limits proposed by the first line of the position, performance and trends of structural risks through the different axes and levels defined, reporting regularly to Bank’s Management to provide a general view of the risk profile and if necessary, request action measures to the lines of business.defense. |
| ●o | AcceptanceIt oversees the first line of defense’s structural risk limitsmanagement and risk appetite, products and transactions.checks compliance with set limits. |
| ●o | DefinitionIt regularly reports on risk profile to senior management and monitoringissues guidelines to business lines about measures it deems necessary. |
| o | It evaluates and challenges commercial proposals and gives senior management information to understand the interest rate risk of the Bank’s businesses and operations. |
| o | It confirms proper structural risk procedure, in addition to formulating and overseeing models and policies. |
As already described for tradingLike market risk, under thestructural risk also has an annual limits plan framework limits are alsoto set forstructural balance sheet structural risks, respondingrisk limits according to the Bank’s risk appetite level.appetite.
The main limits are: | ● | Balance sheet structural interest rate risk: |
| - | Limit on the sensitivity of net interest income over a one-year horizon. |
| - | Limit on the sensitivity of the value of equity. |
| - | Limit on the market value of Asset-Liability Committee (ALCO) portfolios under stress scenarios and that given their accounting classification (fair value with changes in equity) could have an impact on shareholders' equity. |
| ● | Structural exchange rate risk: |
| - | NetLimit on the net permanent position inof the core capital ratio. |
| - | Limit on individual hedge required for each currency (for results hedging positions).currency. |
In the event that one of these limits or their sub-limits is breached, theBusiness lines’ risk management executives from the lines of businessmanagers must explain the reasonsprove explanations for thispotential limit and providesub-limit breaches as well as an action plan to correct it.them.
Methodologies and other key details a) Structural interest rate risk The Bank analyzes the sensitivityAs part of its equity value and net interest income to changes in interest rates as well as its different sources and sub-types of risk. These sensitivities measure the impact of changes in interest rates on the value of a financial instrument, a portfolio and the Bank as a whole, as well as the impact on the profitability structure over the given time horizon for which net interest income (NIM) is calculated.
Taking into consideration the balance-sheet interest rate position and the market situation and outlook, the necessary financial actions are adopted to align this position with that defined by the Bank. These measures can range from opening positions in markets to the definition of the interest rate characteristics of our commercialized products.
The metrics used by the Bank to controlstructural risk, interest rate risk in these activities are the re-pricing gap, sensitivitybanking book (IRRBB) is the main source of netbalance sheet risk.
The Bank measures the potential impact of interest incomerate movements on Economic Value of Equity (EVE) and Net Interest Margin (NIM). Because changing rates may generate impacts, the Bank must manage and control many subtypes of interest rate risk, such as repricing risk, curve risk, basis risk and option risk (e.g. behavioral or automatic). Interest rate risk in the balance sheet and market value of equity (MVE)conditions and outlooks could necessitate certain financial measures to changes inachieve the Bank's desired risk profile. The metrics that the Bank uses to monitor IRRBB include NIM and EVE sensitivity to interest rates, the duration of capital and Value at Risk (VaR) for economic capital calculation purposes.rate movements. b) Interest rate gap on assets and liabilities This is the basic concept for identifying the Bank’s interest rate risk profile and it measures the difference between the volume of sensitive assets and liabilities on and off balance sheet that re-price (i.e. that mature or are subject to rate revisions) at certain times (called, buckets). This provides an immediate approximation of the sensitivity of the entity’sBank’s balance sheet and its net interest income and equity value to changes in interest rates. c) Net interest income (NIM) sensitivity Net interest income (NIM)NIM is calculated as the difference between income from interest on assets and the interest cost of liabilities in the banking book over a given time horizon of one year. NIM sensitivity is the difference between the NIM calculated under a selected scenario and the NIM calculated under a base scenario. Therefore, there may be as many NIM sensitivities as there are scenarios considered. This metric allows for the identification of short-term risks, and it is complementary to the EVE sensitivity.
d) Economic value of equity (EVE) sensitivity This measures the interest rate risk implicit in equity value, which for the purposes of interest rate risk is defined as the difference between the net current value of assets and the net current value of outstanding liabilities, based on the impact that a change in interest rates would have on those current values. EVE sensitivity is obtained as the difference between the EVE calculated under a selected scenario and the one calculated under a base scenario. Therefore, there may be as many EVE sensitivities as there are scenarios considered. This metric allows for the identification of long-term risks and it is complementary to NIM. e) Treatment of liabilities with no defined maturity Under the Bank´s model, the total volume of account balances with no maturity is divided between stable and unstable balances, which are obtained from a model based on the relationship between balances and their own moving averages. From the methodology described above and, an exponential time decay simplified model for the stable part, the monthly cash flows are obtained and used to calculate NIM and EVE sensitivities.
f) Pre-payment treatment for certain assets The potential pre-payment risk mainly affects fixed-rate mortgages. This risk is modelled and included in the metrics used to monitor the risk appetite. g) Value at Risk (VaR) For balance sheet activity and investment portfolios, this is defined as the 99% percentile of the distribution function of losses in equity value, calculated based on the current market value of positions and returns over the last two years, at a particular level of statistical confidence over a certain time horizon. As with trading portfolios, a period of two years or at least 520 days from the reference date of the VaR calculation is used. h) Structural foreign exchange rate risk These activities are monitored via position measurements and results, on a daily basis. i) Structural equity risk These activities are monitored via position measurements, VaR and results, on a monthly basis. 5. Structural balance sheet risks key metrics The market risk profile inherent to the Bank’s balance sheet, in relation to its asset volumes and shareholders’ equity, as well as the budgeted net interest income, remained moderate in 2020,2022, in line with previous years. The interest rate risk originated by commercial banking is transferred for management purposes – through an internal risk transfer system – to the Financial area, which is responsible for Bank’s structural risk management generated by interest rate fluctuations. The Bank’s usual practice is to measure interest rate risk by using statistical models, relying on mitigation strategies for structural risk using interest rate instruments, such as fixed income bond portfolios and financial derivative instruments to maintain the risk profile at levels that are appropriate to the risk appetite approved by the Board of Directors. Structural interest rate risk The interest rate risk in the balance sheet management portfolios, measured in terms of NIM sensitivity at one year to a parallel increase of hundred basis points in the yield curve, remained stable throughout 2018 under 700 million pesos, mainly due to the short-term re-pricing of the loan portfolio. At the end of December 2018, the risk consumption measured in terms of hundred basis points MVE sensitivity stood under 3,900 million pesos.
The table below shows in millions of pesos the distribution of interest rate risk by maturity as of December 31, 2018. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first
scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 101,353 | | | 35,304 | | | — | | | — | | | — | | | 52 | | | — | | | — | | | 65,997 | | Loans | | | 789,010 | | | 400,172 | | | 44,475 | | | 27,446 | | | 51,727 | | | 119,014 | | | 56,923 | | | 90,388 | | | (1,135) | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | (226) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (226) | | Securities | | | 351,755 | | | 59,520 | | | 11,051 | | | 8,589 | | | 44,187 | | | 58,048 | | | 13,198 | | | 30,524 | | | 126,637 | | Permanent | | | 14,417 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 14,417 | | Other Assets | | | 2,491,052 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,491,052 | | Total Balance Sheet Assets | | | 3,747,361 | | | 494,996 | | | 55,526 | | | 36,035 | | | 95,914 | | | 177,114 | | | 70,121 | | | 120,912 | | | 2,696,742 | | Money Market | | | (114,421) | | | (27,386) | | | (89) | | | — | | | — | | | — | | | — | | | — | | | (86,945) | | Deposits | | | (636,907) | | | (253,774) | | | (17,801) | | | (12,984) | | | (91,065) | | | (156,158) | | | — | | | (105,126) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (207,327) | | | (65,439) | | | (6,383) | | | (9,993) | | | (8,361) | | | (14,760) | | | (60,990) | | | (3,727) | | | (37,675) | | Equity | | | (125,813) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (125,813) | | Other Liabilities | | | (2,527,900) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,527,900) | | Total Balance Sheet Liabilities | | | (3,612,368) | | | (346,599) | | | (24,273) | | | (22,977) | | | (99,426) | | | (170,918) | | | (60,990) | | | (108,853) | | | (2,778,333) | | Total Balance Sheet Gap | | | 134,993 | | | 148,397 | | | 31,253 | | | 13,058 | | | (3,512) | | | 6,196 | | | 9,131 | | | 12,059 | | | (81,591) | | Total Off-Balance Sheet Gap | | | (5,070) | | | 27,072 | | | 576 | | | (1,096) | | | 4,739 | | | (5,802) | | | (3,267) | | | (27,293) | | | — | | Total Structural Gap | | | | | | 175,469 | | | 31,829 | | | 11,962 | | | 1,227 | | | 394 | | | 5,864 | | | (15,234) | | | (81,591) | | Accumulated Gap | | | — | | | 175,469 | | | 207,298 | | | 219,260 | | | 220,487 | | | 220,881 | | | 226,745 | | | 211,511 | | | 129,920 | |
The interest rate risk in the balance sheet management portfolios, measured in terms of NIM sensitivity at one year to a parallel increase of hundred basis points in the yield curve, remained stable throughout 2019 under 1,000 million pesos, mainly due to the short-term re-pricing of the loan portfolio. At the end of December 2019, the risk consumption measured in terms of hundred basis points MVE sensitivity stood under 3,700 million pesos.
The table below shows in millions of pesos the distribution of interest rate risk by maturity as of December 31, 2019. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 84,372 | | | 33,396 | | | 4,299 | | | 1,714 | | | 393 | | | 29 | | | — | | | — | | | 44,540 | | Loans | | | 828,076 | | | 415,078 | | | 48,155 | | | 29,078 | | | 54,722 | | | 125,650 | | | 60,560 | | | 95,727 | | | (895) | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | 2,391 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,391 | | Securities | | | 399,818 | | | 43,227 | | | 10,226 | | | 4,405 | | | 7,133 | | | 69,280 | | | 62,236 | | | 88,523 | | | 114,790 | | Permanent | | | 16,890 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 16,890 | | Other Assets | | | 2,465,434 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,465,434 | | Total Balance Sheet Assets | | | 3,796,981 | | | 491,701 | | | 62,680 | | | 35,197 | | | 62,248 | | | 194,959 | | | 122,796 | | | 184,250 | | | 2,643,150 | | Money Market | | | (211,629) | | | (105,227) | | | (591) | | | — | | | — | | | — | | | — | | | — | | | (105,810) | | Deposits | | | (631,480) | | | (238,192) | | | (25,728) | | | (14,968) | | | (89,071) | | | (145,780) | | | — | | | (117,741) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (207,463) | | | (79,157) | | | (10,176) | | | (9,497) | | | (11,461) | | | (37,462) | | | (27,899) | | | (9,177) | | | (22,633) | | Equity | | | (138,381) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (138,381) | | Other Liabilities | | | (2,458,248) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,458,248) | | Total Balance Sheet Liabilities | | | (3,647,201) | | | (422,576) | | | (36,495) | | | (24,465) | | | (100,532) | | | (183,242) | | | (27,899) | | | (126,918) | | | (2,725,072) | | Total Balance Sheet Gap | | | 149,780 | | | 69,125 | | | 26,185 | | | 10,732 | | | (38,284) | | | 11,717 | | | 94,897 | | | 57,332 | | | (81,922) | | Total Off-Balance Sheet Gap | | | (27,704) | | | 93,301 | | | 1,883 | | | (85) | | | (3,869) | | | (20,620) | | | (14,927) | | | (83,290) | | | (99) | | Total Structural Gap | | | | | | 162,426 | | | 28,068 | | | 10,647 | | | (42,153) | | | (8,903) | | | 79,970 | | | (25,958) | | | (82,021) | | Accumulated Gap | | | — | | | 162,426 | | | 190,494 | | | 201,141 | | | 158,988 | | | 150,085 | | | 230,055 | | | 204,097 | | | 122,076 | |
The interest rate risk in the balance sheet management portfolios, measured in terms of NIM sensitivity at one year to a parallel increase of hundred basis points in the yield curve, remained stable throughout 2020 under 3501,000 million pesos, mainly due to the short-term re-pricing of the loan portfolio. At the end of December 2020, the risk consumption measured in terms of hundred basis points MVE sensitivity stood under 3,0003,700 million pesos. The table below shows in millions of pesos the distribution of interest rate risk by maturity as of December 31, 2020. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 208,892 | | | 97,682 | | | 224 | | | 10 | | | — | | | — | | | — | | | — | | | 110,976 | | Loans | | | 842,579 | | | 391,465 | | | 51,416 | | | 29,398 | | | 40,954 | | | 110,704 | | | 59,480 | | | 158,690 | | | 473 | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | 2,324 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,324 | | Securities | | | 612,958 | | | 92,700 | | | 10,420 | | | 18,633 | | | 12,072 | | | 120,979 | | | 50,809 | | | 93,965 | | | 213,379 | | Permanent | | | 17,838 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17,838 | | Other Assets | | | 2,432,847 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,432,847 | | Total Balance Sheet Assets | | | 4,117,438 | | | 581,847 | | | 62,060 | | | 48,041 | | | 53,026 | | | 231,683 | | | 110,289 | | | 252,655 | | | 2,777,837 | | Money Market | | | (415,269) | | | (136,167) | | | (25) | | | — | | | — | | | (35) | | | — | | | — | | | (279,042) | | Deposits | | | (712,440) | | | (538,576) | | | (28,189) | | | (7,546) | | | (38,605) | | | (40,318) | | | — | | | (59,206) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (234,391) | | | (71,773) | | | (13,809) | | | (8,311) | | | (5,645) | | | (65,572) | | | (39,636) | | | (8,094) | | | (21,552) | | Equity | | | (158,338) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (158,338) | | Other Liabilities | | | (2,421,345) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,421,345) | | Total Balance Sheet Liabilities | | | (3,941,783) | | | (746,516) | | | (42,023) | | | (15,857) | | | (44,250) | | | (105,925) | | | (39,636) | | | (67,300) | | | (2,880,277) | | Total Balance Sheet Gap | | | 175,655 | | | (164,669) | | | 20,037 | | | 32,184 | | | 8,776 | | | 125,758 | | | 70,653 | | | 185,355 | | | (102,440) | | Total Off-Balance Sheet Gap | | | (27,858) | | | 96,078 | | | (518) | | | (7,124) | | | (1,257) | | | (16,773) | | | (20,744) | | | (77,053) | | | (466) | | Total Structural Gap | | | | | | (68,591) | | | 19,519 | | | 25,060 | | | 7,519 | | | 108,985 | | | 49,909 | | | 108,302 | | | (102,906) | | Accumulated Gap | | | — | | | (68,591) | | | (49,072) | | | (24,012) | | | (16,493) | | | 92,492 | | | 142,401 | | | 250,703 | | | 147,797 | |
The interest rate risk in the balance sheet management portfolios, measured in terms of NIM sensitivity at one year to a parallel increase of hundred basis points in the yield curve, remained stable throughout 2021 under 350 million pesos, mainly due to the short-term re-pricing of the loan portfolio. At the end of December 2021, the risk consumption measured in terms of hundred basis points MVE sensitivity stood under 3,000 million pesos. The table below shows in millions of pesos the distribution of interest rate risk by maturity as of December 31, 2021. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first
scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 208,892 | | | 97,682 | | | 224 | | | 10 | | | — | | | — | | | — | | | — | | | 110,976 | | | | 107,529 | | | 40,153 | | | 36 | | | — | | | — | | | — | | | — | | | — | | | 67,340 | | Loans | | | 842,579 | | | 391,465 | | | 51,416 | | | 29,398 | | | 40,954 | | | 110,704 | | | 59,480 | | | 158,690 | | | 473 | | | | 1,011,713 | | | 415,520 | | | 56,759 | | | 41,235 | | | 52,466 | | | 147,987 | | | 82,115 | | | 203,678 | | | 11,953 | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | 2,324 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,324 | | | | 4,368 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,368 | | Securities | | | 612,958 | | | 92,700 | | | 10,420 | | | 18,633 | | | 12,072 | | | 120,979 | | | 50,809 | | | 93,965 | | | 213,379 | | | | 592,439 | | | 87,765 | | | 44,143 | | | 15,045 | | | 9,531 | | | 138,771 | | | 127,591 | | | 43,135 | | | 126,458 | | Permanent | | | 17,838 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17,838 | | | | 18,931 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,931 | | Other Assets | | | 2,432,847 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,432,847 | | | | 2,550,757 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,550,757 | | Total Balance Sheet Assets | | | 4,117,438 | | | 581,847 | | | 62,060 | | | 48,041 | | | 53,026 | | | 231,683 | | | 110,289 | | | 252,655 | | | 2,777,837 | | | | 4,285,737 | | | 543,438 | | | 100,938 | | | 56,280 | | | 61,997 | | | 286,758 | | | 209,706 | | | 246,813 | | | 2,779,807 | | Money Market | | | (415,269) | | | (136,167) | | | (25) | | | — | | | — | | | (35) | | | — | | | — | | | (279,042) | | | | (237,962) | | | (136,942) | | | (203) | | | (119) | | | (37) | | | (6) | | | — | | | — | | | (100,655) | | Deposits | | | (712,440) | | | (538,576) | | | (28,189) | | | (7,546) | | | (38,605) | | | (40,318) | | | — | | | (59,206) | | | — | | | | (773,147) | | | (316,556) | | | (25,179) | | | (8,115) | | | (104,567) | | | (152,067) | | | — | | | (166,663) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (234,391) | | | (71,773) | | | (13,809) | | | (8,311) | | | (5,645) | | | (65,572) | | | (39,636) | | | (8,094) | | | (21,552) | | | | (207,558) | | | (45,398) | | | (2,677) | | | (6,338) | | | (26,383) | | | (37,397) | | | (62,168) | | | (7,745) | | | (19,452) | | Equity | | | (158,338) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (158,338) | | | | (165,539) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (165,539) | | Other Liabilities | | | (2,421,345) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,421,345) | | | | (2,577,883) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,577,883) | | Total Balance Sheet Liabilities | | | (3,941,783) | | | (746,516) | | | (42,023) | | | (15,857) | | | (44,250) | | | (105,925) | | | (39,636) | | | (67,300) | | | (2,880,277) | | | | (3,962,089) | | | (498,896) | | | (28,059) | | | (14,572) | | | (130,987) | | | (189,470) | | | (62,168) | | | (174,408) | | | (2,863,529) | | Total Balance Sheet Gap | | | 175,655 | | | (164,669) | | | 20,037 | | | 32,184 | | | 8,776 | | | 125,758 | | | 70,653 | | | 185,355 | | | (102,440) | | | | 323,648 | | | 44,542 | | | 72,879 | | | 41,708 | | | (68,990) | | | 97,288 | | | 147,538 | | | 72,405 | | | (83,722) | | Total Off-Balance Sheet Gap | | | (27,858) | | | 96,078 | | | (518) | | | (7,124) | | | (1,257) | | | (16,773) | | | (20,744) | | | (77,053) | | | (466) | | | | 16,348 | | | 85,733 | | | (353) | | | (7,870) | | | 5,373 | | | 936 | | | (52,397) | | | (15,036) | | | (38) | | Total Structural Gap | | | | | | (68,591) | | | 19,519 | | | 25,060 | | | 7,519 | | | 108,985 | | | 49,909 | | | 108,302 | | | (102,906) | | | | | | | 130,275 | | | 72,526 | | | 33,838 | | | (63,617) | | | 98,224 | | | 95,141 | | | 57,369 | | | (83,760) | | Accumulated Gap | | | | | | (68,591) | | | (49,072) | | | (24,012) | | | (16,493) | | | 92,492 | | | 142,401 | | | 250,703 | | | 147,797 | | | | — | | | 130,275 | | | 202,801 | | | 236,639 | | | 173,022 | | | 271,246 | | | 366,387 | | | 423,756 | | | 339,996 | |
The interest rate risk in the balance sheet management portfolios, measured in terms of NIM sensitivity at one year to a parallel increase of hundred basis points in the yield curve, remained stable throughout 2022 under 500 million pesos, mainly due to the short-term re-pricing of the loan portfolio. At the end of December 2022, the risk consumption measured in terms of hundred basis points MVE sensitivity stood under 2,500 million pesos. The table below shows in millions of pesos the distribution of interest rate risk by maturity as of December 31, 2022. The reported amounts include estimated interest on fixed and variable rate instruments. Interest on variable rate instruments is determined using the rate in effect as of the balance sheet date for the first scheduled interest payment and amounts are determined based on the contractual spread for each period thereafter. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 130,928 | | | 47,853 | | | — | | | — | | | — | | | — | | | — | | | — | | | 83,075 | | Loans | | | 1,156,551 | | | 457,396 | | | 62,232 | | | 47,152 | | | 72,844 | | | 191,785 | | | 105,972 | | | 185,834 | | | 33,336 | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | 4,287 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,287 | | Securities | | | 606,595 | | | 20,336 | | | 74,919 | | | 13,451 | | | 16,256 | | | 130,150 | | | 146,119 | | | 25,853 | | | 179,511 | | Permanent | | | 12,794 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,794 | | Other Assets | | | 2,830,134 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,830,134 | | Total Balance Sheet Assets | | | 4,741,289 | | | 525,585 | | | 137,151 | | | 60,603 | | | 89,100 | | | 321,935 | | | 252,091 | | | 211,687 | | | 3,143,137 | | Money Market | | | (232,148) | | | (126,156) | | | (70) | | | (33) | | | (52) | | | (18) | | | — | | | — | | | (105,819) | | Deposits | | | (852,714) | | | (282,371) | | | (30,164) | | | (30,052) | | | (103,999) | | | (203,423) | | | — | | | (202,705) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (234,697) | | | (75,556) | | | (6,376) | | | (11,100) | | | (32,087) | | | (45,344) | | | (24,593) | | | (10,276) | | | (29,365) | | Equity | | | (166,838) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (166,838) | | Other Liabilities | | | (2,794,488) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,794,488) | | Total Balance Sheet Liabilities | | | (4,280,885) | | | (484,083) | | | (36,610) | | | (41,185) | | | (136,138) | | | (248,785) | | | (24,593) | | | (212,981) | | | (3,096,510) | | Total Balance Sheet Gap | | | 460,404 | | | 41,502 | | | 100,541 | | | 19,418 | | | (47,038) | | | 73,150 | | | 227,498 | | | (1,294) | | | 46,627 | | Total Off-Balance Sheet Gap | | | 111,813 | | | 134,000 | | | 1,336 | | | 2,524 | | | 9,324 | | | (2,520) | | | (117,351) | | | (11,824) | | | 96,324 | | Total Structural Gap | | | | | | 175,502 | | | 101,877 | | | 21,942 | | | (37,714) | | | 70,630 | | | 110,147 | | | (13,118) | | | 142,951 | | Accumulated Gap | | | | | | 175,502 | | | 277,379 | | | 299,321 | | | 261,607 | | | 332,237 | | | 442,384 | | | 429,266 | | | 572,217 | |
Structural foreign exchange rate risk Structural exchange rate risk arises from BankBank’s transactions in foreign currencies. The management of this risk is dynamic and seeks to limit the impact on the core capital ratio of foreign exchange rate movements. In 2020,2022, hedging of the core capital ratio for foreign exchange rate risk were kept close to 100%.under established limits. The Bank´s objective is to maintain the structural exchange-rate risk completely hedged with a management limit of USD 15 million that represents 0.02% ofestablished by each foreign currency where the total assets as of December 31, 2020.entity is exposed to, aligned with the correspondent positions. Structural equity risk The Bank maintains equity positions in its banking book in addition to those of the trading portfolio. These positions are maintained as equity instruments or as equity stakes, depending on the percentage owned or control. The equity portfolio available for the banking book at the end of December 2020 was diversified in securities in various segments. Most of the portfolio is invested in financial activities. Among other sectors, to a lesser extent, are for example real estate activities or public administrations.
As of December 31, 2020,2022, the Bank does not maintain any equity positions in its banking book. 6. Liquidity risk management The responsibilities of the liquidityLiquidity risk functionfunction’s role in the second line of defense is to ensure liquidity risks are to:understood, controlled and reported to senior management and across the Bank according to established governance: | ●o | Provide oversight ofIt determines liquidity risk management, as carried outand provides detailed measurements of current and emerging risks. |
| o | It sets liquidity risk metrics, and reviews and challenges liquidity risk appetite and limits proposed by the first line of defense. |
| ●o | VerifyIt oversees the first line of defense’s liquidity risk management; measures how long business will remain within risk appetite limits; and checks compliance with established liquidity risk policies and limits, and assess whether businesses remain within the Bank’s risk appetite limits. Report, as necessary, |
| o | It reports to governing bodies on risk, risk appetite and potential breaches thereof, to the appropriate governance bodies.exceptions. |
| ●o | Express an opinionIt evaluates and challengechallenges commercial and business proposals. Provide Bank’s Managementproposals, and thegives senior management and business units with the elements requiredinformation they need to understand the Bank’s liquidity risk of the different businesses and activities. |
| ● | Provide a consolidated view of liquidity risk exposures; including the liquidity risk profile.risk. |
| ●o | Provide detailed assessmentsIt provides a comprehensive overview of materialour liquidity risksrisk exposure and closely monitor emerging risks.profile. |
| ●o | Define metrics to be used inIt makes sure the liquidity risk measurement, review and challenge liquidity risk appetite and lower-level limits proposals from the first line of defense. |
| ● | Confirm whether adequate liquidity procedures are in place for managing theare appropriate to manage business within risk appetite limits. |
Methodologies and key other key details The Bank measures liquidity risk using a range of tools and metrics that account for the risk factors identified within this risk. a) Liquidity buffer The buffer is a portion of the total liquidity available to an entity to deal with potential withdrawals of funds (liquidity outflows) that may arise as a result of periods of stress. Specifically, a buffer consists of a set of unencumbered liquid resources that are available for immediate use and capable of generating liquidity promptly, without incurring any loss or excessive discount. The Bank uses the liquidity buffer as a tool that forms part of the calculation of most liquidity metrics. b) Liquidity Coverage Ratio (LCR) LCR has a regulatory definition and is intended to reinforce the short-term resistance of banks’ liquidity risk profile by ensuring that they have available sufficient high-quality liquid assets to withstand a stress scenario (idiosyncratic stress or market stress) of considerable severity for thirty calendar days. The monitoring and surveillance of compliance with this standard is responsibility of the Mexican Central Bank, which, within the scope of its competence, jointly issued with the CNBV on December 31, 2014, the General Provisions on Liquidity Requirements for Banking Institutions (hereinafter, the "Liquidity Requirements") (Disposiciones de carácter general sobre los Requerimientos de Liquidez para las Instituciones de Banca Múltiple) applicable to the calculation, elements and scenarios of the Liquidity Coverage Ratio, in accordance with the guidelines established by the Basel Committee on Banking Supervision in October 2014. The objectives of the liquidity requirements are as follows: | ● | To anticipate that banking institutions in Mexico has available liquid assets with high credit quality to manage their obligations and liquidity necessities along thirty days. |
| ● | To establish a liquidity coverage ratio as per a methodology in line with the international standards, which must include all foreign currencies. |
| ● | To include both on and off balance transactions in the liquidity coverage ratio calculation, as long as those transactions represent a liquidity potential risk for banking institutions. |
| ● | To anticipate that banking institutions in Mexico consolidate their subsidiaries, which core business, relates to financial operations. |
The liquidity coverage ratio is the result of dividing the liquid assets by the net cash flow.
c) Wholesale gap metric This metric measures the number of days the Bank would survive using its liquid assets to cover the liquidity losses assuming non-renewable wholesale financing outflows for a determined liquidity horizon. In addition, it is also used as an internal short-term liquidity metric helping to reduce the risk of dependence on wholesale funding. d) Net Stable Funding Ratio (NSFR) NSFR is one of the metrics used by the Bank to measure long-term liquidity risk. It is a regulatory metric defined as the coefficient of the available amount of stable funding and the required amount of stable funding. This metric requires banks to maintain a solid balance sheet where assets and off-balance sheet activities are funded with stable liabilities. This ratio seeks to reduce the liquidity risk for a longer time horizon, by requiring the banks that finance their activities through stable sources of financing, in accordance with the liquidity and maturity of its assets, mitigating the risk of episodes of liquidity stress in the future, and also prevents excessive dependence on sources of short-term wholesale financing. The monitoring and surveillance of compliance with this standard is responsibility of the Mexican Central Bank, which, within the scope of its competence, jointly issued with the CNBV on December 31, 2014, the Liquidity Requirements applicable to the calculation, elements and scenarios of the Net Stable Funding Ratio, in accordance with the guidelines established by the Basel Committee on Banking Supervision in October 2014. The CNBV and Mexican Central Bank have not issued its final definition of the Net Stable Funding Ratio based on the guidelines approved by the Basel Committee in October 2014.
e) Asset encumbrance metrics The Bank uses at least two types of metrics to measure asset encumbrance risk. The first is the asset encumbrance ratio, which calculates the proportion of total encumbered assets to the entity’s total assets. The second, the structural asset encumbrance ratio, which measures the proportion of encumbered assets deriving from structural funding transactions (mainly long-term collateralized issuances and funding from the Central Bank).
f) Other liquidity indicators
Aside from traditional liquidity risk measurement tools for short-term risk and long-term or funding risk, the Bank has constructed a range of additional liquidity indicators that supplement the conventional tool-set and measure other liquidity risk factors not otherwise covered. These indicators include concentration metrics, such as top one and five funding providers, or distribution of funding by maturity date. g)f) Liquidity scenario analysis
The Bank uses four standard scenarios as liquidity stress tests: | i. | | An idiosyncratic scenario featuring events that adversely affect the Bank alone; |
| ii. | | A local market scenario, which considers events that have serious adverse effects on the financial system or real economy of the country; |
| iii. | | A global market scenario, which considers events that have serious adverse effects on the global financial system; and |
| iv. | | A combined scenario, coupling idiosyncratic events with severe (local and global) market events arising simultaneously and interactively. |
The Bank uses the outcomes of the stress scenarios in combination with other tools to determine risk appetite and support business decision-making. h)g) Liquidity early warning indicators (EWI)
The system of liquidity EWIearly warning indicators (EWI) comprises quantitative and qualitative indicators that enable the Bank to foresee liquidity stress situations and potential weaknesses in the Bank’s funding and liquidity structure. EWI are both external (environmental) and internal, respectively relating to market financial variables and to the Bank’s own actions. h) Intraday liquidity metrics The Bank follows Basel regulation and calculates several metrics and stress scenarios for intraday liquidity risk to maintain a high level of control. 7. Liquidity risk key metrics The Bank has a strong liquidity and financing position and maintains large buffers of highly liquid assets. Since the beginning of the COVID-19 pandemic, liquidity has been closely monitored and preventive management measures were carried out to strengthen it. During four days in March 2020,As of December 31, 2022, the Bank’s LCR ratio was below the threshold. The regulatory minimum required in 2020 was 100% and the internal limit was 110%, afterwards LCR remains stable with regulatory ratios above. During 2020, the weighted average LCR for the Bank is 159.37%196.60%, complying with the Bank´s desired risk profile and well above the regulatory minimum established. In addition, the Central Bank has adopted measures to provide significant liquidity to the system.
The Bank has an effective management of its liquidity buffers to face the challenge of maintaining a proper liquidity profile (regulatory limits) while protecting the profitability of the balance sheet. Furthermore, the Bank maintains sound balance sheet structures, with a stable financing structure based on a broad customer deposit base, which covers structural needs, with low dependence on short-term funding and liquidity metrics well above regulatory requirements level and within the limits defined on the risk appetite framework. Hence, for long-term liquidity, the regulatory metric NSFR remainsremained above 100%, anticipating compliance with the regulatory minimum requirement and internal risk appetite. In terms of structural assets encumbrance risk, the Bank’s levels are in line with those of its peers, where the main sources of encumbrance are secured lending and collateralized funding facilities provided by the Central Bank. The soundness of the Bank’s balance sheet is also demonstrated under stress scenarios. The Bank would survive the remote case scenario for at least forty-five days, meeting liquidity requirements with their liquid asset buffers alone. The table below shows in millions of pesos the distribution of the liquidity risk by maturity as of December 31, 2018. The reported amounts include cash flows from interest on fixed and variable rate instruments.
The interest on variable rate instruments is determined using the forward interest rates for each period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 101,353 | | | 35,304 | | | — | | | — | | | — | | | 52 | | | — | | | — | | | 65,997 | | Loans | | | 894,975 | | | 63,631 | | | 77,990 | | | 77,902 | | | 117,370 | | | 262,468 | | | 126,185 | | | 170,565 | | | (1,135) | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | (226) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (226) | | Securities | | | 265,639 | | | 204,594 | | | 143 | | | 1,183 | | | 42,759 | | | 1,766 | | | 3,098 | | | 11,128 | | | 968 | | Permanent | | | 14,417 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 14,417 | | Other Assets | | | 2,491,052 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,491,052 | | Total Balance Sheet Assets | | | 3,767,210 | | | 303,529 | | | 78,133 | | | 79,085 | | | 160,129 | | | 264,286 | | | 129,283 | | | 181,693 | | | 2,571,073 | | Money Market | | | (114,421) | | | (27,386) | | | (89) | | | — | | | — | | | — | | | — | | | — | | | (86,945) | | Deposits | | | (643,226) | | | (253,793) | | | (20,848) | | | (17,375) | | | (14,367) | | | (19,813) | | | (11,475) | | | (305,556) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (214,803) | | | (3,470) | | | (10,517) | | | (17,219) | | | (29,238) | | | (40,266) | | | (72,295) | | | (4,010) | | | (37,788) | | Equity | | | (125,813) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (125,813) | | Other Liabilities | | | (2,527,900) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,527,900) | | Total Balance Sheet Liabilities | | | (3,626,163) | | | (284,649) | | | (31,454) | | | (34,594) | | | (43,605) | | | (60,079) | | | (83,770) | | | (309,566) | | | (2,778,446) | | Total Balance Sheet Gap | | | 141,047 | | | 18,880 | | | 46,679 | | | 44,491 | | | 116,524 | | | 204,207 | | | 45,513 | | | (127,873) | | | (207,373) | | Total Off-Balance Sheet Gap | | | 30,927 | | | 755 | | | 108 | | | (144) | | | 1,637 | | | 5,657 | | | 6,293 | | | 3,781 | | | 12,838 | | Total Structural Gap | | | | | | 19,635 | | | 46,787 | | | 44,347 | | | 118,161 | | | 209,864 | | | 51,806 | | | (124,092) | | | (194,535) | | Accumulated Gap | | | | | | 19,635 | | | 66,422 | | | 110,769 | | | 228,930 | | | 438,794 | | | 490,600 | | | 366,508 | | | 171,973 | |
The table below shows in millions of pesos the distribution of the liquidity risk by maturity as of December 31, 2019.2020. The reported amounts include cash flows from interest on fixed and variable rate instruments. The interest on variable rate instruments is determined using the forward interest rates for each period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 83,423 | | | 38,853 | | | — | | | — | | | — | | | 29 | | | — | | | — | | | 44,540 | | | | 210,487 | | | 99,500 | | | — | | | 10 | | | — | | | — | | | — | | | — | | | 110,976 | | Loans | | | 923,390 | | | 63,743 | | | 91,160 | | | 73,504 | | | 122,407 | | | 280,957 | | | 121,497 | | | 171,017 | | | (895) | | | | 906,434 | | | 53,486 | | | 86,614 | | | 70,534 | | | 103,026 | | | 252,900 | | | 113,424 | | | 225,978 | | | 473 | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | 2,391 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,391 | | | | 2,324 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,324 | | Securities | | | 411,339 | | | 31,965 | | | 1,856 | | | 1,861 | | | 10,709 | | | 81,502 | | | 63,620 | | | 98,939 | | | 120,887 | | | | 619,308 | | | 81,245 | | | 5,776 | | | 18,753 | | | 16,306 | | | 124,401 | | | 59,352 | | | 96,046 | | | 217,429 | | Permanent | | | 16,890 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 16,890 | | | | 17,838 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17,838 | | Other Assets | | | 2,465,434 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,465,434 | | | | 2,432,847 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,432,847 | | Total Balance Sheet Assets | | | 3,902,867 | | | 134,561 | | | 93,016 | | | 75,365 | | | 133,116 | | | 362,488 | | | 185,117 | | | 269,956 | | | 2,649,247 | | | | 4,189,238 | | | 234,231 | | | 92,390 | | | 89,297 | | | 119,332 | | | 377,301 | | | 172,776 | | | 322,024 | | | 2,781,887 | | Money Market | | | (210,680) | | | (100,790) | | | (718) | | | (684) | | | (2,116) | | | (903) | | | — | | | — | | | (105,470) | | | | (416,864) | | | (136,167) | | | (342) | | | (397) | | | (877) | | | (78) | | | — | | | — | | | (279,004) | | Deposits | | | (709,438) | | | (238,812) | | | (33,549) | | | (26,289) | | | (26,585) | | | (62,061) | | | (42,162) | | | (279,979) | | | — | | | | (765,648) | | | (188,768) | | | (36,499) | | | (22,885) | | | (26,267) | | | (78,592) | | | (62,686) | | | (349,951) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (213,656) | | | (8,851) | | | (18,714) | | | (23,558) | | | (34,569) | | | (66,566) | | | (29,414) | | | (9,339) | | | (22,644) | | | | (237,778) | | | (7,804) | | | (13,606) | | | (23,355) | | | (32,978) | | | (88,412) | | | (41,763) | | | (8,307) | | | (21,553) | | Equity | | | (138,381) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (138,381) | | | | (158,338) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (158,338) | | Other Liabilities | | | (2,458,248) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,458,248) | | | | (2,421,345) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,421,345) | | Total Balance Sheet Liabilities | | | (3,730,403) | | | (348,453) | | | (52,981) | | | (50,531) | | | (63,270) | | | (129,530) | | | (71,576) | | | (289,318) | | | (2,724,743) | | | | (3,999,973) | | | (332,739) | | | (50,447) | | | (46,637) | | | (60,122) | | | (167,082) | | | (104,449) | | | (358,258) | | | (2,880,240) | | Total Balance Sheet Gap | | | 172,464 | | | (213,892) | | | 40,035 | | | 24,834 | | | 69,846 | | | 232,958 | | | 113,541 | | | (19,362) | | | (75,496) | | | | 189,265 | | | (98,508) | | | 41,943 | | | 42,660 | | | 59,210 | | | 210,219 | | | 68,327 | | | (36,234) | | | (98,353) | | Total Off-Balance Sheet Gap | | | 20,905 | | | (15,134) | | | 398 | | | 730 | | | 1,125 | | | 10,566 | | | 5,253 | | | 6,175 | | | 11,791 | | | | (3,137) | | | (18,378) | | | (431) | | | (337) | | | 233 | | | 3,417 | | | (1,112) | | | (494) | | | 13,964 | | Total Structural Gap | | | | | | (229,026) | | | 40,433 | | | 25,564 | | | 70,971 | | | 243,524 | | | 118,794 | | | (13,187) | | | (63,705) | | | | | | | (116,886) | | | 41,512 | | | 42,323 | | | 59,443 | | | 213,636 | | | 67,215 | | | (36,728) | | | (84,389) | | Accumulated Gap | | | | | | (229,026) | | | (188,593) | | | (163,029) | | | (92,058) | | | 151,466 | | | 270,260 | | | 257,073 | | | 193,368 | | | | | | | (116,886) | | | (75,374) | | | (33,051) | | | 26,392 | | | 240,028 | | | 307,243 | | | 270,515 | | | 186,126 | |
The table below shows in millions of pesos the distribution of the liquidity risk by maturity as of December 31, 2020.2021. The reported amounts include cash flows from interest on fixed and variable rate instruments. The interest on variable rate instruments is determined using the forward interest rates for each period presented. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 107,493 | | | 40,153 | | | — | | | — | | | — | | | — | | | — | | | — | | | 67,340 | | Loans | | | 1,016,312 | | | 59,574 | | | 98,867 | | | 85,021 | | | 112,761 | | | 272,326 | | | 122,316 | | | 253,494 | | | 11,953 | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | 4,368 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,368 | | Securities | | | 592,439 | | | 76,155 | | | 43,313 | | | 3,745 | | | 12,135 | | | 138,771 | | | 135,369 | | | 56,492 | | | 126,459 | | Permanent | | | 18,931 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 18,931 | | Other Assets | | | 2,548,067 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,548,067 | | Total Balance Sheet Assets | | | 4,287,610 | | | 175,882 | | | 142,180 | | | 88,766 | | | 124,896 | | | 411,097 | | | 257,685 | | | 309,986 | | | 2,777,118 | | Money Market | | | (237,926) | | | (134,800) | | | (429) | | | (525) | | | (1,426) | | | (90) | | | — | | | — | | | (100,656) | | Deposits | | | (773,147) | | | (276,799) | | | (30,673) | | | (14,064) | | | (22,018) | | | (53,199) | | | (43,500) | | | (332,894) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (207,558) | | | (14,789) | | | (6,815) | | | (16,950) | | | (28,540) | | | (43,550) | | | (68,411) | | | (9,051) | | | (19,452) | | Equity | | | (165,539) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (165,539) | | Other Liabilities | | | (2,577,883) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,577,883) | | Total Balance Sheet Liabilities | | | (3,962,053) | | | (426,388) | | | (37,917) | | | (31,539) | | | (51,984) | | | (96,839) | | | (111,911) | | | (341,945) | | | (2,863,530) | | Total Balance Sheet Gap | | | 325,557 | | | (250,506) | | | 104,263 | | | 57,227 | | | 72,912 | | | 314,258 | | | 145,774 | | | (31,959) | | | (86,412) | | Total Off-Balance Sheet Gap | | | (5,852) | | | (22,002) | | | (221) | | | 150 | | | 5,385 | | | 5,184 | | | 3,377 | | | 2,276 | | | — | | Total Structural Gap | | | | | | (272,508) | | | 104,042 | | | 57,377 | | | 78,297 | | | 319,442 | | | 149,151 | | | (29,683) | | | (86,412) | | Accumulated Gap | | | | | | (272,508) | | | (168,466) | | | (111,089) | | | (32,792) | | | 286,650 | | | 435,801 | | | 406,118 | | | 319,706 | |
The table below shows in millions of pesos the distribution of the liquidity risk by maturity as of December 31, 2022. The reported amounts include cash flows from interest on fixed and variable rate instruments.
The interest on variable rate instruments is determined using the forward interest rates for each period presented. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | Total | | | 0 - 1 Months | | | 1 - 3 Months | | | 3 - 6 Months | | | 6 - 12 Months | | | 1 - 3 Years | | | 3 - 5 Years | | | > 5 Years | | | Not Sensitive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Money Market | | | 210,487 | | | 99,500 | | | — | | | 10 | | | — | | | — | | | — | | | — | | | 110,976 | | | | 134,410 | | | 51,335 | | | — | | | — | | | — | | | — | | | — | | | — | | | 83,075 | | Loans | | | 906,434 | | | 53,486 | | | 86,614 | | | 70,534 | | | 103,026 | | | 252,900 | | | 113,424 | | | 225,978 | | | 473 | | | | 1,156,553 | | | 75,674 | | | 118,921 | | | 99,078 | | | 140,331 | | | 310,763 | | | 145,584 | | | 232,864 | | | 33,338 | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | 2,324 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,324 | | | | 4,287 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,287 | | Securities | | | 619,308 | | | 81,245 | | | 5,776 | | | 18,753 | | | 16,306 | | | 124,401 | | | 59,352 | | | 96,046 | | | 217,429 | | | | 606,595 | | | 10,347 | | | 69,040 | | | 1,550 | | | 16,256 | | | 137,928 | | | 149,530 | | | 42,434 | | | 179,510 | | Permanent | | | 17,838 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 17,838 | | | | 12,794 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 12,794 | | Other Assets | | | 2,432,847 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,432,847 | | | | 2,830,134 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,830,134 | | Total Balance Sheet Assets | | | 4,189,238 | | | 234,231 | | | 92,390 | | | 89,297 | | | 119,332 | | | 377,301 | | | 172,776 | | | 322,024 | | | 2,781,887 | | | | 4,744,773 | | | 137,356 | | | 187,961 | | | 100,628 | | | 156,587 | | | 448,691 | | | 295,114 | | | 275,298 | | | 3,143,138 | | Money Market | | | (416,864) | | | (136,167) | | | (342) | | | (397) | | | (877) | | | (78) | | | — | | | — | | | (279,004) | | | | (235,631) | | | (126,156) | | | (667) | | | (1,199) | | | (1,322) | | | (467) | | | — | | | — | | | (105,820) | | Deposits | | | (765,648) | | | (188,768) | | | (36,499) | | | (22,885) | | | (26,267) | | | (78,592) | | | (62,686) | | | (349,951) | | | — | | | | (852,726) | | | (255,400) | | | (38,223) | | | (41,931) | | | (24,700) | | | (69,164) | | | (53,900) | | | (369,408) | | | — | | Trade Finance | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Intragroup | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Long-Term Funding | | | (237,778) | | | (7,804) | | | (13,606) | | | (23,355) | | | (32,978) | | | (88,412) | | | (41,763) | | | (8,307) | | | (21,553) | | | | (234,698) | | | (7,557) | | | (16,327) | | | (27,461) | | | (44,947) | | | (59,249) | | | (38,701) | | | (11,091) | | | (29,365) | | Equity | | | (158,338) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (158,338) | | | | (166,838) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (166,838) | | Other Liabilities | | | (2,421,345) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,421,345) | | | | (2,794,488) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,794,488) | | Total Balance Sheet Liabilities | | | (3,999,973) | | | (332,739) | | | (50,447) | | | (46,637) | | | (60,122) | | | (167,082) | | | (104,449) | | | (358,258) | | | (2,880,240) | | | | (4,284,381) | | | (389,113) | | | (55,217) | | | (70,591) | | | (70,969) | | | (128,880) | | | (92,601) | | | (380,499) | | | (3,096,511) | | Total Balance Sheet Gap | | | 189,265 | | | (98,508) | | | 41,943 | | | 42,660 | | | 59,210 | | | 210,219 | | | 68,327 | | | (36,234) | | | (98,353) | | | | 460,392 | | | (251,757) | | | 132,744 | | | 30,037 | | | 85,618 | | | 319,811 | | | 202,513 | | | (105,201) | | | 46,627 | | Total Off-Balance Sheet Gap | | | (3,137) | | | (18,378) | | | (431) | | | (337) | | | 233 | | | 3,417 | | | (1,112) | | | (494) | | | 13,964 | | | | 104,840 | | | (20,129) | | | (987) | | | 2,642 | | | 2,943 | | | 4,516 | | | 224 | | | 3,639 | | | 111,991 | | Total Structural Gap | | | | | | (116,886) | | | 41,512 | | | 42,323 | | | 59,443 | | | 213,636 | | | 67,215 | | | (36,728) | | | (84,389) | | | | | | | (271,886) | | | 131,757 | | | 32,679 | | | 88,561 | | | 324,327 | | | 202,737 | | | (101,562) | | | 158,618 | | Accumulated Gap | | | | | | (116,886) | | | (75,374) | | | (33,051) | | | 26,392 | | | 240,028 | | | 307,243 | | | 270,515 | | | 186,126 | | | | | | | (271,886) | | | (140,129) | | | (107,450) | | | (18,889) | | | 305,438 | | | 508,175 | | | 406,613 | | | 565,231 | |
Relaxation supervisory measures implemented as a result of COVID-19
On April 8, 2020, the Banking Liquidity Regulatory Committee, comprised of the Mexican Central Bank, the SHCP and the CNBV issued a series of exceptions to the "Liquidity Requirements" (Disposiciones de Carácter General sobre los Requerimientos de Liquidez para las Instituciones de Banca Múltiple) in order to avoid amplifying constraints in market conditions. In general terms, these exceptions permit the following: (i) assets that were eligible as liquid assets as of February 28, 2020 may continue to be considered as such, even if they would otherwise no longer be eligible as a result of the volatility in financial markets in recent weeks and (ii) the liquidity reserves calculation for potential margin calls and valuation changes of portfolios of financial derivatives may exclude data for March 2020. In addition, no corrective actions will be taken for financial institutions whose LCR falls below 100%. These temporary measures will be in place until September, 2021.
d) Capital risk 1. Introduction The Bank defines capital riskCapital Risk as the risk of lacking sufficient capital, either in quantitativequantitatively or qualitative terms,qualitatively, to fulfil its business objectives, regulatory requirements, or market expectations. The second line of defense has to independently challenge business and first-line risk management activities by: •Supervising capital policies, planning, and adequacy exercises through a review of the main components affecting the capital ratios. •Defining and monitoring key metrics to calculate the Bank’s regulatory capital, setting tolerance levels and analyzing significant variations, as well as single transactions with impact on capital. •Reviewing and challenging the execution of capital actions proposed in line with capital planning and risk appetite. Capital Risk function, carries out, among other tasks, the oversight and controlwhich is part of the capital activities developed by the first line. These are grouped in four different work streams, ensuring that monitoring is in accordance with the Bank’s risk profile: | ● | Capital planning: Internal process which aims to set capital levels and capital returns consistent with the Bank’s strategy execution. The Bank should ensure its solvency and capital efficiency. For this purpose, the Bank identifies the capital actions required to achieve its defined capital ratios and return on capital targets. |
| ● | Capital adequacy: Process to assess the capital levels to cover the nature and level of risks that the entity is, or may be, exposed to, in accordance with the risk identification and assessment process, the Bank’s strategy, defined risk appetite, and different macroeconomic scenarios (base and stress scenarios). |
| ● | Capital measurement: Required activities to obtain solvency metrics levels. This process includes defining the methodology to be followed to obtain the final figures required. |
| ● | Origination: Process to evaluate the efficiency of the portfolios to identify potential initiatives for capital relief (i.e. securitizations, risk mitigation techniques or asset sales). |
2. Capital risk management
Capital risk, the second line of defense, independently challengescontrols and oversees first-line capital management. It checks that the first line activities mainly through the following processes:
| ● | Supervision of capital planning and adequacy exercises through a review of the main components, assumptions, models, macroeconomic scenarios that may affect solvency levels projection. |
| ● | Ongoing supervision of the Bank’s regulatory capital measurement by identifying the main risks of the key metrics by setting tolerance levels and reviewing capital consumption and the consistency of the calculations, including single transactions with an impact on capital. |
| ● | Review and challenge of the execution of those capital actions proposed in line with capital planning and risk appetite. |
The function is designed to carry out full and regular monitoring of capital risk by verifying that capital is sufficient and adequately covered in accordance withcoverage match the Bank’s risk profile. It also approves and monitors transactions that could be significant risk transfers.
Capital risk control is part of the general risk framework as well as of the Bank's capital framework and model. It brings together a range of processes, such as capital planning and adequacy, and the subsequent budget execution and monitoring, alongside the ongoing measurement of capital and the reporting and disclosure of capital data. Supervision of capital planning and adequacy exercises The Capital Risk function reviewschallenges capital planning and adequacy exercises to ensure that capital is consistent with the established risk appetite and risk profile. It has the following fundamental objectives: | ● | Ensure that all relevant risks to which the Bank is subject, in the course of its activity are monitored. |
| ● | Check that the methodologies and assumptions used in these planning processes are appropriate. |
| ● | Verify that results are reasonable and consistent with the business strategy, and the macroeconomic environment. |
| ● | Assess the consistency between different exercises, especially those that use baseline and stressed scenarios. |
•Ensure that the credit, market and operational risks to which the Bank is subject to in the course of its activity, are monitored. •Check that the methodologies and assumptions used in these planning processes are within the internal and external regulatory scope. •Verify that results and outcomes are reasonable and consistent with the business strategy, and the macroeconomic and financial system environment. •Assess the consistency between the assumptions and outcomes of different exercises. This function is implemented in phases, according to the following:following phases: i.Definition of scope The capital planningii.Information requirement and adequacy supervision begins with the preparation of the materiality proposal, identifying business units’ risks that might affect the Bank’s solvency.quality check
iii.Qualitative analysis In this phase, the overall quality of the qualitative forecasts process is assessed, and includes a review of the following aspects:
| ● | Models used in the generation of forecasts and scenarios, scope, metrics covered. |
| ● | Documentation available and provided in the generation process. |
| ● | The quality of the information included in the forecasts, the integrity of the data, the controls applied, the recommendations issued by Internal Audit, etc. |
Governance of the process, committees before which the forecasts have been presented and reviewed, approval by different areas prior to final approval.
iv.Quantitative analysis The defined metrics that affect projections of capital components are quantitatively assessed.
This phase calls for the second line involvement and appropriate coordination with the first line to conduct an analysis of the main risks that may affect in the Bank’s solvency.
v.Conclusions and disclosure Based on the outcomes from the capital planning and adequacy supervision, the first line and second line conducts a final assessment, at least encompassing the scope of analysis, the process weaknesses and improvement areas, main identified risks, solvency risk appetite achievement and reporting to the Bank’s Management in accordance with established governance. This ensures that effective and constructive challenge is conducted from the second line of defense concerning the proposed capital plans.
If deemed necessary, a discussion of these conclusions will be proposed in the comprehensive risk managementappropriate committee. Ongoing supervision of capital measurement Ongoing supervision of the measurement of the Bank’s regulatory capital, ensuringensures an appropriate capital risk appetite. For this purpose, the second line function conducts a qualitative analysis of the regulatory and supervisory framework and an ongoing review of the Bank’s appetite and specified thresholds. Moreover, ongoing monitoring of compliance with the capital risk appetite is conducted aiming to maintain capital levels above the regulatory requirements and market expectations. To fulfil this function, the following phases have been established: i.Definition of metrics and thresholds AThe set of metrics and thresholds that are used in the supervision process are defined to enable adequate capital risk monitoring and control. These are specified on an annual basis.
The metrics consist of: | ● | Primary metrics: Risk aggregated metrics under Board of Directors’ direct control that express the Bank’s risk profile. |
| ● | Secondary metrics: include a more extensive breakdown of primary metrics and allow more granularity and risk appetite management. |
| ● | Monitoring metrics: provide a more detailed analysis. |
•Primary metrics: Risk aggregated metrics under Board of Directors’ direct control that express the Bank’s risk profile. •Secondary metrics: these include a more extensive breakdown of primary metrics and allow more granularity and risk appetite management. •Monitoring metrics: these provide a more detailed analysis. Thresholds are set for primary and secondary metrics, which if breached, trigger a more detailed analysis and an explanation of the causes of the breach. ii.Preliminary analysis This analysis comprises the main qualitative issues that may affect the Bank’s solvency, such as process governance and regulatory framework changes. The analysis includes a review of available information, a qualitative assessment of the latest regulatory changes, and a review of pending recommendations given by corresponding committees. iii.Measurement assessment Based on the information provided,received (after being deemed as sufficient), the Capital Risk function analyzes the metrics defined in the process, according to the following procedure: | ● | Review of primary and secondary metrics to detect variations that exceed the defined thresholds, and where they do, perform a detailed analysis of the causes and analyses supplementary metrics. |
| ● | If the origin of the incident lies in a specific business unit, information that is more detailed is requested. |
| ● | Incidents detected must be analyzed in terms of their causes (change in volumes, changes in the profile, one-off events, capital actions, etc.) and discussed with the corresponding function involved. |
•Determines the scope of the assessment. •Reviews primary and secondary metrics to detect variations that exceed the defined thresholds, and where they do, perform a detailed analysis of the causes and analyses supplementary metrics. •If the origin of the breach lies in a specific business unit, more detailed information is requested, in order to find its specific causes. •Incidents detected must be analyzed in terms of their causes (change in volumes, changes in the profile, one-off events, capital actions, etc.) and discussed with the corresponding function involved. iv.Conclusions and disclosure The governance body responsible for capital risk control discusses the report containing the conclusions and,conclusions. In addition, the report willmay be proposed for discussion in the relevant first line committee (capital committee) and second line committee (comprehensive risk management committee).corresponding committees.. 3. Key metrics The Bank has a strong capital position consistent with its business model, balance sheet structure, risk profile and regulatory requirements. The Bank’s strong balance sheet and profitability enables the financial growth and continued accumulation of capital. The capital metrics of the Bank are stable, with ratios comfortably above the regulatory requirements and at appropriate levels, aligned with the risk appetite statement approved by the Bank’s Management. Regulatory capital The Basel III regulatory framework implemented in Mexico since January 2013 establishes minimum capital levels in a very significant manner, both quantitatively (increased minimum requirements for Core Capital and Tier I Basic Capital, plus higher deductions from capital base) and from a qualitative point of view (higher quality of required capital).
From the capital standpoint, Basel III redefines what is considered to be available capital at financial institutions (including new deductions and raising the requirements for eligible equity instruments), increases the minimum capital requirements, requires financial institutions to operate permanently with capital buffers, and adds new requirements in relation to the risks considered. As of December 31, 2020,2022, the Bank met the minimum capital requirements established by current legislation. The key regulatory capital figures are shown in Note 30. Leverage ratio To ensure the financial stability of the banking system as a whole, as well as to comply with the agreements of the Basel Committee on Banking Supervision, the CNBV established the methodology to calculate the leverage ratio for banks. This leverage ratio shows if the capital of the banks adequately supports their assets. Such information is helpful for the market participants, as well as for the supervisory work of the CNBV. This ratio is calculated as Tier I capital divided by leverage exposure. Exposure is calculated as the sum of the following items: | ● | Accounting assets, excluding financial derivatives and items treated as deductions from Tier 1 capitalI Capital (for example, the balance of loans is included, but not that of goodwill). |
| ● | Off-balance sheet items (mainly guarantees, unused credit limits granted and documentary credits) weighted using credit conversion factors. |
| ● | Inclusion of net value of financial derivatives (gains and losses are netted with the same counterparty minus collaterals if they comply with certain criteria) plus a charge for the future potential exposure. |
| ● | A charge for the potential risk of securities funding transactions. |
The General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) issued by the CNBV does not establish a minimum percentage of compliance, as it is considered for the baseline reference effect (the minimum of 3%). As of December 31, 2020,2022, the leverage ratio for the Bank is 7.39%7.13%. Systemic important bank On April 29, 2016, the Bank was appointed by the CNBV as a systemic important bank, assigning a Grade III of systemic importance. As a result, the Bank should progressively constitute in four years a capital preservation supplement of 1.20%, starting in 2016. As of December 31, 2019,2022, the Bank constituted 100% of the required capital preservation supplement requiredsupplement. Relaxation supervisory measures implemented as a result of COVID-19
On April 8, 2020, the CNBV issued some resolutions and provisions to address the contingency derived from the COVID-19 pandemic. In this sense, the CNBV, approved temporary amendments to the General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito) regarding regulatory capital.
The CNBV determined to grant temporary regulatory support measures regarding capitalization, between April 1, 2020 and March 31, 2021, in order to allow banks to use the capital conservation supplement (capital buffer) without impairing its minimum solvency.
In the General Provisions Applicable to Credit Institutions (Disposiciones de Carácter General Aplicables a las Instituciones de Crédito), the Early Alerts System (Sistema de Alertas Tempranas) of capitalization considers that banks may use supplements of capital conservation, precisely to face stressed scenarios like the current scenario of contingency caused by the COVID-19 pandemic, as provided in the international prudential standards of the Basel Committee.
Regulatory support measures consist, among others, on the fact that banks will not have to submit the capital conservation plan for CNBV’s approval when using capital conservation supplements, if such supplement is consumed in a maximum of 50%. The CNBV, and not its board of directors, must be informed of the causes that originated the use of the supplement; otherwise, authorization must be requested from the CNBV so that, in justified cases, the banks can increase the amounts disposed of the loans granted to related persons.
Additionally, as another regulatory support measure, the CNBV will published the standard related to the Total Loss-Absorbing Capacity (TLAC) (Capacidad Total para la Absorción de Pérdidas) when it is considered that the economic conditions allow for its implementation by banks. The TLAC standard issued by the Financial Stability Board requires global systemically important banks (G-SIB) to have financial instruments available during resolution to absorb losses and enable them to be recapitalized to continue performing their critical functions while the resolution process is ongoing. The objective is to have an orderly resolution by making debt/equity holders absorb losses (enabling a “bail-in”), instead of using public funds (conducting a “bailout”).
On April 8, 2020, the CNBV issued a number of temporary regulatory flexibility measures aimed at ensuring that financial institutions are able to continue supplying credit to their customers in a high volatility environment and mitigating the impact of the COVID-19 pandemic on the local credit markets. The temporary measures were effective from April 1, 2020 to March 31, 2021 and allowed financial institutions to use their capital conservation buffer of 2.5% without triggering any regulatory corrective measures. As of December 31, 2020, the Bank´s Net Capital Ratio stood at 19.01%, which is significantly in excess of the minimum requirement established for financial institutions comparable to the Bank’s size. The Bank decided not to apply the optional regulatory support measure.
Model roll-out
As regards credit risk, the Bank continued its plan to implement Basel’s internal ratings-based (IRB) approach for regulatory capital calculation for credit risk. As of December 31, 2020, the Bank currently has supervisory authorization to use the AIRB approach for calculating the regulatory capital requirements for the following loan portfolio: local corporates and real estate developers and using a FIRB approach for the following portfolios: Global Corporate and financial institutions (banks).
With regard to operational risk, until September 2015, the CNBV considered the application of the Basic Indicator method for calculating the capital requirement for this type of risk. As a result of regulatory changes published in October 2015 by the CNBV, it was made available for banks to utilize -with previous approval from the CNBV- the application of the Standardized Approach (TSA), the Alternative Standardized Approach (ASA) or the Advanced method (AMA) for calculating the capital requirement for operational risk. The Bank started calculating the operational risk capital requirements under the ASA in November 2016.
For market risk, the calculation of the capital requirement is made under the standard methodology according to the provisions established by CNBV.
e) Operational risk Regarding operational risk, the Bank has policies, procedures and methodologies for the identification, control, mitigation, surveillance and disclosure of operational risks. For the identification and grouping of operational risks, the different categories and lines of business defined by the regulatory entities are used. The methodology is based on the identification and documentation of risks, controls and related processes and uses quantitative and qualitative tools such as self-assessment questionnaires, the development of historical databases and operational risk indicators, etc., both for control and mitigation and disclosure thereof 1. Introduction The Bank defines operationalOperational risk in line with the Basel framework,is defined as the riskpotential loss due to failures or deficiencies in internal controls, due to errors in the processing and storage of losses arising from defectsoperations or failures in its internal processes, people, systemsthe transmission of information, as well as adverse administrative and judicial resolutions, fraud or external events, coveringtheft. It covers other risk categories such as fraud, technological risk, cyber-risk and legal or conduct risk.
a) Technological risk is defined as the potential loss due to damage, interruption, alteration or failure derived from the use of hardware, software, systems, applications, networks and any other information transmission channel in the provision of banking services to customers of the institution. b) Legal risk is defined as the potential loss due to non-compliance with the applicable legal and conduct risk.administrative provisions, the issuance of unfavorable administrative and judicial resolutions and the application of sanctions, in relation to the Operations that the Institution carries out. Operational risk is inherent to all products, activities, processes and systems and is generated in all business unitsbusinesses and support areas. For this reason,areas and it is inherent in all employees are responsible for managingproducts to manage and controllingcontrol the operational risks generated by their activities. The Bank’s goal in terms of operational risk control and management model is based on a continuous process to identify, assess and control is focused on identifying, evaluating and mitigatingmitigate sources of risk, regardless of whether they have materialized or not. The analysis of the exposure to operational risk helps to determinenot, guaranteeing that risk management priorities. Risk analysis improved in 2020 through different initiatives such as the definition of new risk appetite metrics, the integration of thematic assessments into the Risk and Control Self-Assessment (RCSA), as well as the implementation of an enhanced oversight process and the development of a transformation risk analysis methodology.
Mitigation plans have been promoted on aspects with special relevance (fraud, cybersecurity and vendor management, among others), focused on both the implementation of corrective actions and the proper monitoring and management of ongoing projects.priorities are adequately established.
2. Operational risk management The following items underpin operational risk management: Framework and tools The Bank’s operational risk model defines the necessary elements of suitable management and control of operational risk and compliance with advanced regulatory standards and best practices for operational risk management. The management and control of operational risk must be carried out throughout its cycle, which includes: strategy and planning; risk identification and assessment; risk monitoring; the application and monitoring of mitigation measures; and the availability of information, appropriate reporting and escalation of relevant aspects when necessary. Policies and procedures have been defined to regulate the management and control of operational risk, as well as the tools in support of these processes. The most important operational risk tools used by the Bank are the following: | ● | Internal events database. The events database provides information to improve operational risk management and control, through root cause analysis, enhancement of risk awareness and events management. Events that are registered in the database can have a financial impact (the Bank records all losses regardless of the amount) or a non-financial impact (such as regulatory, reputational or customer and services). |
The internal database is supplemented by the relevant events escalation process, which allows managing and reporting to the Bank’s Management the occurrence of significant operational risk events arising across the Bank on a timely basis.
| ● | Operational risk and control self-assessment (RCSA). A qualitative process that seeks, using the criteria and experience of a pool of experts in each function, to determine the main operational risks for each function, the status of the existing control environment and their allocation to the different functions within the Bank. |
The goal of the RCSA is to identify and assess the material operational risks that could prevent business units or support areas from achieving their objectives. Once they are assessed, mitigation actions are identified if the risk levels prove to be above the tolerable levels. The Bank also undertakes risk assessments for specific sources of operational risk, enabling a more granular and transversal identification of potential risks. In particular, these are applied to technological risks, fraud, third party risk and factors that could lead to specific regulatory non-compliance, in addition areas that are exposed to money laundering and terrorism financing risks. | ● | External event database. The external database provides quantitative and qualitative information, allowing for a more detailed and structured analysis of relevant events that have occurred in the industry, the benchmarking of the losses profile and the appropriate preparation for the RCSA, insurance and scenario analysis exercises. |
| ● | Operational risk scenarios analysis. The objective of this tool is to identify potential events with a very low probability of occurrence, but which could result in significant losses for the Bank, and to establish appropriate mitigating actions. Expert opinion is obtained from the business lines and risk and control managers. |
| ● | Key risk indicators. These metrics provide quantitative information on the Bank’s risk exposure and the existing control environment. The most significant indicators associated with the main risk factors are part of the operational risk appetite. |
| ● | Risk Appetite. Non-financial risks appetite framework is structured as follows: |
| - | A general statement setting out that the Bank is, on principle, averse to operational risk events that could lead to financial loss, fraud, operational, technological, legal and regulatory breaches, conduct problems or damage to its reputation. |
| - | General metrics of expected losses and stressed losses. |
| - | An additional statement, specifically, on the following: internal and external fraud, technological, cyber-risk, anti-money laundering, products commercialization, regulatory compliance and vendor management risk. |
| - | Continuous follow up to detect breaches in any of our mainly process, avoiding an impact to the Bank’s risk appetite. |
| ● | Internal Audit and regulatory recommendations. These provide relevant information on inherent and residual risk due to internal and external factors, enabling the identification of areas of improvement in the existing processes and controls. |
| ● | Other specific instruments. There are other instruments that enable further analysis and management of operational risk, such as the new products and services assessment, the reporting of key IT and cyber-security events, monthly and annual loss forecasts, business continuity plan (BCP) management, perimeter review and the quality assurance process. |
| ● | Capital model. A loss distribution approach (LDA) model is used to capture the Bank’s operational risk profile, based on information collected from the internal loss database, external data and scenarios. |
| | The main application of the model is to determine operational risk’s economic capital and to estimate expected and stressed losses, which are then used for operational risk appetite. |
Model implementation and initiativesManagement
The Bank performs an annual review of the operational risk profile to identify all legal entities, in which the operational risk program must be implemented or improved according to their risk profile.
The main activities and initiatives for effective operational risk management are: | ● | Continuous enhancement of the integration of all tools, mentioned above, in order to perform cross- analysis. |
| ● | Greater harmonization and integration of IT &and cyber-risk processes within the BankBank’s operational risk methodology framework. |
| ● | Evolving IT, cyber and vendor management appetite metrics by improving their definition, measurement and by stressing the thresholds. |
| ● | Processes improvements for the determination, identification and assessment of standard controls that have been aligned with internal policies, with the aim of strengthening and homogenizing the control environment in the Bank. |
| ● | Establishing independent oversight and evaluation of the Bank’s control environment to challenge adequately the risk and control manager’s views. |
| ● | Continue improving the integration of operational risk in the Bank’s strategic plan, by including information regarding the potential exposure for the next three years as well as the estimated level of losses. |
| ● | Fostering mitigation plans for specific risks such as fraud, cybersecurity and vendor management, among others. |
| ● | Improving the assessment methodology of the cybersecurity transformation plan to identify the risk reduction impact derived from implementation of technical security milestones. |
| ● | Improvements in the contingency, business continuity and crisis management plans on a coordinated initiative with recovery and resolution plans, also providing coverage to emerging risks. |
| ● | Fostering technology risk control (control and supervision of the IT systems design, infrastructure management and applications development) by defining Reference Risksreference risks to be assessed during RCSA by business owners and specialized control functions. |
| ● | Developing a framework for the identification, assessment, aggregation and mitigation of Transformation/Changetransformation/change risk. |
Operational risk information system The Bank’s information system for operational risk (Heracles) supports operational risk programs, providing information for management and reporting purposes. Heracles’ main goal is to improve decision-making related to operational risk management throughout the Bank, preventing redundant or duplicated efforts.
This goal is achieved by ensuring that all people responsible for risks throughout the Bank are provided with a fuller and more precise view of their risks in a timely manner, through the integration of several programs, such as risk and control assessment, scenarios, events and metrics with a common set of taxonomies, and methodological standards. In 2020, further integrationF-220
Mitigation actions In line with the model, the Bank implements and monitors mitigation actions related to the main risk sources, which are identified through the operating risk management tools and other external information sources. Furthermore, the Bank continued to promote the preventive implementation of policies and procedures for operational risk management and control. The most significant mitigation actions are focused on improving the customer security in their usual operations, as well as on continuous improvements in processes and technology, product sales and an adequate and continuous provision of services. Fraud The transformation and digitalization of the business imply new threats related to the digital world. To mitigate these risks, new products and control mechanisms are designed and reviewed taking into account potential attacks through digital means. The use of strong customer authentication processes, the implementation of biometric validation (i.e. facial recognition) in the on-boarding customer process, etc., is becoming increasingly widespread helping mitigate these risks. About reducing fraud, the Bank deploys specific actions such as the following: Card fraud: | ● | Generalized use of Chip & PINand Personal Identification Number (PIN) (operation with PIN-cards, which require the transaction to be signed-off with a numeric code), both in automated teller machines (ATM) and in physical stores, with advanced authentication mechanisms in the communication between the ATM and the point-of-sale and the Bank’s systems. |
| ● | Card protection against electronic commerce fraud: |
| - | Implementation of a secure e-commerce standard (3DSecure) via two-step authentication based on one-time passwords. |
| - | Solutions based on mobile applications that let users deactivate cards for e-commerce use. |
| - | Virtual cards issuance using dynamic authentication passwords. |
| ● | Integration of monitoring and fraud detection tools with other systems, internally and externally, to enhance suspicious activity detection capabilities. |
| ● | Reinforced ATM security by incorporating physical protection elements and anti-skimming, as well as improvements in the logical security of the devices. |
Online/mobile banking fraud: | ● | Validations of online banking transactions through a second security factor based on one-time-use passwords. Evolution of technology (for example, based on image codes -QR codes - generated from the transaction data). |
| ● | Enhanced online banking security by introducing a transaction risk scoring system that requests further authentication when a given security threshold is breached. |
| ● | Implementation of specific protection measures for mobile banking, such as identification and registration of customer devices (Device ID). |
| ● | Monitoring of e-banking platform security to avoid systems attacks. |
Cybersecurity and data security plans Throughout the year, the Bank continued to focus on cybersecurity risks, which affect all companies and institutions, including those in the financial sector. This situation is a cause of concern for all entities and regulators, prompting the implementation of preventive actions to be prepared for any attack of this kind. The Bank has continued to mature its cybersecurity controls and regulations in line with the Bank’s cybersecurity framework, and based in international best practices. The Bank has also made positive progress with its ambitious program to transform cybersecurity in order to strengthen detection, response and protection mechanisms. At the same time, cyber threats continue to increase in severity and complexity across all industries and geographies. The Bank regularly reviews and evolves its defenses in order to continuously improve, and address existing and emerging cyber threats. The second line of defense, cybersecurity risk team has evolved the process for assessment of cyber risk to incorporate oversight across all the core cyber risk domains in the information security program. This includes oversight and assessment of risk reduction effectiveness of the cybersecurity transformation plan. Vendor management As part of its digitalization strategy, the Bank aims to offer its customers the best solutions and products available in the market, which in many cases entail an increase in outsourcing activities or the employment of third party services. This aspect, together with the intensive use of new technologies such as the cloud, the increase of cyber-related risks and an increase in regulatory pressure in this area, making it necessary to reinforce procedures and controls to ensure that the risks arising from hiring suppliers are known and managed appropriately. In order to cover new regulatory requirements, the Bank’s efforts have mainly been aimed at: | ● | The definition of new criteria for classifying services according to their level of relevance. This level of relevance will determine the different requirements for approval, registration and monitoring of the services. |
| ● | Methodology improvements to identify and analyze inherent risks. |
| ● | Controls have been reinforced in the different phases of the vendor management model to ensure that services that involve accessing or processing of sensitive data, including personal data, are correctly identified and classified. |
| ● | The escalation policy has been revised to ensure that the essential outsourcing functions and the critical and high relevance services are reviewed and approved in the appropriate forums, and that the relevant incidents associated with suppliers that provide these services are escalated in due time and manner for review and adequate decision-making. |
| ● | Definition and monitoring of indicators and dashboards with regard to the model implementation process. |
| ● | Reviewing and enhancing the data quality for relevant services and associated suppliers inventories. |
| ● | Progress in the implementation of a management system that automates the supplier management cycle different phases to achieve enhanced process control and higher information quality. |
| ● | Training and raising awareness of risks associated with suppliers and other third parties. |
| ● | Identification of the main suppliers (watchlist). |
| ● | Definition of the procedure for ‘Exit Strategy’. |
| ● | Deployment of the Vendor Risk Assessment Centre (VRAC) function with the aim of making supplier assessments more efficient and standard, ensure that related risks are adequately covered, and execute a certification process before the service is provided. |
Other relevant mitigating actions With regards to mitigation measures related to customer practices, products and businesses, the Bank works to continuously improve and implement policies on aspects such as products and services selling, management and analysis of customer complaints, prevention of money laundering, terrorism financing and compliance with new regulations. Analysis and monitoring of controls in Santander Corporate & Investment Banking Due to the specific nature and complexity of the financial markets, operational control procedures are subject to continuous improvement at Santander Corporate & Investment Banking (business unit which performs the activity related to these markets), which currently focuses on the following aspects: | ● | Reporting and monitoring tools have been strengthened, generating a more robust and systematic methodology for periodic measurement of the main risks, ensuring an adequate level of maturity of all the operational risk tools. |
| ● | Continuous improvement of the control model related to regulatory requirements such as Markets in Financial Instruments Directive (MiFID II), US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank Act), Regulation EU 648/2012 on OTC financial derivatives, central counterparties and trade repositories (EMIR), IFRS 9 and General Data Protection Regulation (GDPR) among others. |
| ● | The risk of unauthorized trading continues to be monitored through a specific risk appetite metric. As part of the control environment continued process of improvement, the guidelines and their monitoring have been strengthened. Further, new reports are being defined to produce more granular monitoring |
| | of market operations re-enforcing business continuity plans, incorporating new scenarios adapted to new industry risks (i.e. cybersecurity scenarios). |
| ● | Strengthening business continuity plans, incorporating new scenarios adapted to new industry risks (i.e. cybersecurity scenarios). |
| ● | Implementation of new tools that reinforce control over communications that occur in the markets trading rooms, among others with a focus on monitoring conduct risk. |
Finally, it should be noted that the business remains immersed in a transformation process that involves the updating of its technological platforms and operational processes, which will, among other objectives, strengthen the control model and reduce the operational risk associated with these activities. Insurance’s role in operational risk management The Bank considers insurance as a key element in the management of operational risk. The Own Insuranceown insurance function achieved a greater level of maturity, obtaining greater consistency and ensuring total coordination between the different functions involved in the insurance management cycle. The following activities should be highlighted: | ● | Continuous fostering of the relationship between the own insurance, operational risk and first line areas, to attain the objective of effective insurable risk management, through their active participation in the insurance and other relevant foraforum established by the Operational Risk function (i.e. fraud forum). |
| ● | Permanent review of the Bank's risks with respect to contracted hedges, in order to identify all risks that may be subject to insurance coverage, analyzing the suitability of the policies for the risks covered and taking appropriate corrective measures in case it is deemed necessary. |
| ● | Monitoring insurable losses and events identified in the insurance policies, establishing action protocols and specific monitoring fora. Identification of all risks in the Bank that can be hedged with insurance, including the identification of new insurance coverage for risks already detected in the market. |
Likewise, the Own Insuranceown insurance function has continued developing its role of protecting the consolidated income statement, mainly through the following tasks: | ● | Establishment and implementation of those criteria to be applied in order to quantify insurable risk, based on the analysis of losses and scenarios, which allow determining the level of exposure of the Bank to each risk. |
| ● | Analysis of the coverage available in the insurance market, and negotiation with suppliers according to the procedures established for this purpose by the Bank. |
| ● | Recovery of insured losses, maximizing the efficiency of the hedged through policies. |
| ● | Participation in various Bank fora/committees related to risk management, increasing their interaction with other Bank functions and ability to properly identify and evaluate insurable risks, as well as their knowledge of existing policies and activation procedures for other Bank areas. |
Business continuity plan The Bank has a Business Continuity Management System (BCMS), that is a holistic management process which identifies the potential impacts threatening the Bank and sets out the protocols and governance to assure the capacity for effective response, so as to minimize the impact of a possible interruption in
business operations, protecting brand reputation, image and safeguarding the interests of the main stakeholders and, in short, making the Bank more resilient against contingency events. The object of the business continuity management model is to define the principles, functional and governance aspects, in addition to the main associated processes and instruments that can be used to adequately develop and implement a business continuity management system, hereinafter BCMS, aligned with sector best practices and which an cover regulatory requirements established for that purpose. | a) | Business impact analysis |
Business impact analysis (BIA) is a criticality analysis matrix, the analysis is based on a compilation of the processes that form part of the activity of each of the Bank’s business units. A criticality assessment is then performed. The Bank has the following Data Centers: CTOS I, CTOS II, Data Center Jurica, Alternate Data Center Cantabria. The Bank has established three buildings for the contingency operation. | c) | Activation of the business continuity plan |
The response protocols for events that cause unexpected or unplanned downtime in critical business operations, must be in alignment with the Bank’s risk escalation policy. In addition, if the event reach severity levels which could be considered as “BAU“Business as Usual (BAU) alert” situation or worst (“Silver” or “Gold” level special situations), as defined within the “Comprehensive Management Model for Special Situations”, the escalation and management procedures established in the Bank’s special situations management policy will be also activated. | d) | Testing and Maintenance |
| ● | CNBV, the Mexican Central Bank and Internal Audit are informed periodically of the results of the Business continuity plan (BCP) and Data recovery plan (DRP) exercises. |
| ● | All plans are tested once a year. |
| ● | Our alternate operations sites (Centros Alternos de Trabajo o CAT(CAT by its Spanish acronym) is tested every year. |
| ● | High availability tests are performed periodically. |
| ● | The Bank performs programed maintenance to BCP at least once a year to ensure that the plans are updated. |
| ● | Continuous updates to BCP and DRP are made in case of changes in the Bank’s organizational structure, technology infrastructure and human resources. |
3. Key metrics Operational risk profile was stable during 2020.2022. The COVID-19 pandemic ledgenerated to an increase in the inherent operational risk exposure, although the Bank has put in placeimplemented additional controls in order to maintain operational risk levels prior to the COVID-19 health crisis
and reinforce the existing ones. The Bank continues closely monitoring the impact of the COVID-19 pandemic in the risk profile and existing control environment. The following aspects were considered a management focus during 2020:2022: | ● | Business continuity plans were effectively deployed to support all the employees, customers and business units. |
| ● | IT performance and support, in order to continue ensuring availability and adequate performance of services, especially in online banking and call centers. |
| ● | Transaction processing related to the volume of new loans and multiple changes in existing portfolios derived from the Support Program and internal policies. |
| ● | Third party risk exposure, as critical providers are being closely watched with focus on business continuity capabilities and service level agreements compliance. |
| ● | Fraud and cyber risk threats across the industry and reinforcement of the Bank’s control environment (i.e. patching, browsing control, data protection controls, etc.), as well as heightening monitoring as a preventive measure. |
| ● | People risk, following the return to offices and/or work from home situation. Measures have been implemented throughout the Bank to ensure a suitable and safe work environment for all employees. |
In 2020, levels of losses in relative terms by Basel categories were lower than as of 2019. There has been no major events related to the COVID-19 pandemic.
Losses in the category of employee practices and damage to physical assets, increased compared to 2019, while external fraud and processes related losses decreased.
Regarding external fraud, the majority of the losses are related to forgery and identity theft, and the fraudulent use of debit and credit cards. The forecast for next year is for this trend to continue, with a potential intensification of the fraudsters' activity in payment transactions and electronic commerce. In this regard, the Bank is continuously improving its monitoring and control procedures and tools with the goal of tackling these risks. f) Compliance and conduct risk 1. Introduction The Compliance and Conduct function fosters the Bank´s adherence to the rules, supervisory requirements, and the principles and values of good conduct, by setting standards, advising and reporting in the interest of employees, customers, shareholders and the community as a whole. This function addresses all matters related to: | ● | Financial crime compliance (FCC). |
| ● | Product governance and consumer protection. |
Under the current configuration of the Bank’s three lines of defense, Compliance and Conduct is an independent second line control function organizationally under the CRO, reporting directly and regularly to the Board of Directors and its committees, through the Chief Compliance Officer (CCO). The Bank’s goal is to minimize the probability of non-compliance events and to identify, evaluate, assess, manage, control and report any potential irregularities that may occur. The Bank sets out in its risk appetite model its zero tolerance for Compliance and Conduct risks with the goal of minimizing the probability of any economic, regulatory or reputational impact. In order to achieve this goal, Compliance and Conduct risk is managed through a homogeneous process carried out towards a common methodology and taxonomy, fully aligned with the Risk function principles, by establishing a series of risk indicators, assessment matrices and qualitative statements. The Annual Compliance Program (ACP) is the key management tool for covering a wide scope of around seventy activities related to risk management, governance and culture. The Board of Directors and the management team of each business unit supervise the Annual Compliance Program, and it is validated by the Bank Compliance and Conduct function. It details the main activities to be developed by the function throughout the year, classified into the following categories: i) governance; ii) findings and recommendations; iii) regulatory radar; iv) risk management; v) culture and vi) improvement projects. 2. Governance The CCO reports to the Bank’s governing and management bodies. This is independent of other reporting obligations by the Risk function to the governance and management bodies of the Bank’s risk profile, which also includes compliance and conduct risks. The governance structure is composed of the general compliance committee (include reputational risk and data protection topics) and two supporting governance fora: product governance forum and the anti-money laundering and terrorism-financing forum. The general compliance committee is the high-level collegiate body of the Compliance and Conduct function. Its main responsibilities are as follows: | ● | Proposing updates and modifications to the general compliance and conduct framework and other corporate frameworks sponsored by the Compliance and Conduct function for ultimate approval by the Board of Directors. |
| ● | Reviewing significant compliance and conduct risk events, measures adopted and their effectiveness. |
| ● | Setting up and assessing corrective actions when risks of this kind are detected in the Bank, either due to weaknesses in the existing management and control or due to emerging new risks. |
| ● | Monitoring newly issued or amended regulations and establishing their scope of application in the Bank, and, if necessary, defining adaptation or mitigation actions. |
3. Compliance and conduct risk management The Compliance and Conduct risk management follows the Bank’s three lines of defense model as an independent second line control function. One of the Compliance and Conduct function’s cornerstones consists on overseeing the effective implementation and monitoring of the General Code of Conduct (GCC) under the supervision of the compliance committee and, if relevant, of the risk supervision, regulation and compliance committee.
The GCC along with other codes and rules and regulations that implement it, includes oversight of the corporate defense model and promotion of the Bank’s Whistleblowingwhistleblowing channel model. The GCC catalogues the ethical principles and rules of conduct by which all activities of the Bank’s employees must be governed. This code must be understood and applied along with the other internal development regulations. The GCC establishes the following: | ● | Compliance functions and responsibilities on the application of the General Code of Conduct; |
| ● | General ethical principles of the Bank; |
| ● | General standards of conduct; |
| ● | The consequences in case of breach; |
| ● | A whistleblowing channel, which allows employees who are aware of allegedly misconducts or that are not aligned with the corporate behaviors, communicate them confidentially and anonymously. |
| ● | Monitoring of personnel’s accounts dealing and flow of material non-public information. |
The following paragraphs provide the details on how risk management is conducted for the additional items that are under the Compliance and Conduct function’s scope: regulatory compliance, securities market, product governance and consumer protection, financial crime compliance and reputational risk, among others. Regulatory Compliance The Regulatory compliance is responsible for controlling and supervising regulatory risks related to employees and securities markets, developing policies and rules. The following functions are in place for the adequate control and management of regulatory compliance risks: | ● | Application and interpretation of the GCC and other codes and rules and regulations that implement it, including oversight of the corporate defense model and promotion of the Bank’s Whistleblowing channel model. |
| ● | Development and application of policies and rules aimed at preventing market abuse, paying special attention to the use of common methodologies and corporate tools. |
| ● | Control and supervision of regulations related to: (i) markets, mainly, Stock Markets Law (Ley(Ley del Mercado de Valores)Valores) and applicable orders, Regulation EU 648/2012 on OTC financial derivatives, central counterparties and trade repositories (EMIR), US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank Act) and Section 619 of the Dodd-Frank Act (Volcker Rule) and (ii) data management, Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) approved by the OrganisationOrganization for Economic Co-operation and Development (OECD) Council on July 15, 2014. |
| ● | Disclosure of relevant BankBank’s information (material facts). |
The most relevant areas of the Regulatory compliance function are described below:
A. Employees The main objective of this function is to extend the ethical and compliance culture across the Bank, establishing internal standards for the prevention of criminal risks, conflicts of interest or anti-competitive behaviors based on the principles established by the General Code of Conduct, which is the central element of Regulatory Compliance. The Bank in its firm commitment against any form of corruption, whether in the public or private sectors, has an Anti-Corruption policy whose purpose is to establish the guidelines to be applied, assign the relevant roles and responsibilities and establish certain anti-corruption elements for its governance. This policy, which can be supplemented by any additional stricter controls derived from more demanding local regulations or obligations and their specific training, includes elements aimed at mitigating and preventing corruption and bribery within the Bank, such as: | ● | Guidelines regarding gifts and invitations extended to public officials. |
| ● | Guidelines regarding the conduct of agents, intermediaries, advisors and business partners. |
| ● | Control and prevention measures regarding third parties (agents, intermediaries, advisors and business partners) with whom the Bank operates; due diligence processes for third parties who are not of renowned prestige; anti-corruption clauses; payment controls; accounting controls. |
| ● | Guidelines regarding the acceptance by Bank employees of gifts or invitations. |
The whistleblowing channel’s goals are: | ● | Contribute to the Bank´s cultural transformation, since it allows to escalate behaviors that are not aligned with our corporate values, in addition to other more usual compliance related cases, such as unlawful acts or breaches of the GCC. |
| ● | Create a working environment where employees feel able to “Speak Up” and are “Truly Listened” to, in line with our Responsible Banking strategy and with our aim to be a bank that is Simple, Personal and Fair. |
| ● | Support financial crime compliance according to the existing regulations and culture objectives. |
B. Market abuse Regulatory compliance tools for market abuse risk prevention and management comprises: | ● | Control room: Monitoring of personal account dealing and flow of material non-public information. |
| ● | Surveillance: Monitoring of the traders and sales personnel activity at the trading floor and ALCO. |
C. Market regulations Regulatory compliance carries out the risk management of the main international markets regulations that affect the Bank, such as Stock Markets Law (Ley(Ley del Mercado de Valores)Valores) and applicable orders, Dodd-Frank and Volcker Rule, among others. D. Data management The focal points for Regulatory compliance are:
| ● | Consolidation of programs and control framework based on three pillars: key compliance indicators (KPI), supervision of compliance with regulatory obligations and annual risk self-assessment. |
| ● | Publication of guidelines and criteria for the processing of personal data. |
| ● | Monitoring of corporate and local initiatives to ensure the effectiveness of the compliance program regarding personal data: review of materials and training courses for all Bank employees; reinforcement of key internal processes (supplier management; information transfers, exercise of ARCO rights, security incident management, among others). ARCO rights are defined as right of access, rectification, cancellation and opposition of the holders on their personal data. |
| ● | Fostering cooperation and best practices sharing among business units. |
Foreign Account Tax Compliance Act and the Common Reporting Standard | ● | In terms of the automatic exchange of tax information among countries (FATCA and CRS), the main oversight activities are centered around: (i) reporting obligations according to local provisions; (ii) remedial actions following Internal Audit’s recommendations and (iii) reinforcement of the control framework (KPI and controls). |
Product governance and consumer protection The product governance and customer protection mission is to ensure that the Bank acts in the customer´s interest by complying with regulations, the entity’s values and principles. This mission is achieved through the following drivers: Culture | ● | Establish the principles of conduct and risk management throughout the commercialization process and the relationship with retail customers. At the same time, establish and manage a strong governance culture. |
| ● | Promote an appropriate culture with a Simple, Personal and Fair approach, to act in the customers´ best interest. |
Processes | ● | Ensure that products are designed to meet the characteristics and needs of customers, with an appropriate balance of risks, costs and profitability. |
| ● | Oversee the sale process to the adequate target market, with proper commercial treatment and transparency of information, as well as salesforce training and compensation systems that encourage performance in the best interest of the customer. |
| ● | Ensure that customer service, post-sale systems and processes facilitate a Simple, Personal and Fair approach to customers, as well as adequate detection and management of any possible deterioration of products and services. |
Management | ● | Ensure that decisions are made, action plans are defined and followed when necessary, and that Bank’s Management and statutory bodies are properly informed. |
| ● | Oversee the design and execution of controls throughout the commercialization and customer relationship process. |
| ● | Identify risks through customer’s voice, regulatory guidelines, industry practices, supervisor and auditor opinions, and learning from internal/external events. |
| ● | Apply BankBank’s risk assessment methodologies, such as management indicators, thematic evaluations, and self-assessments. |
| ● | Mitigate conduct risks with customers through solid oversight, reviewing conduct management based on regular reporting, and capacity and maturity model assessment. |
Financial Crime Compliance (FCC) One of the Bank’s strategic objectives is to maintain advanced and efficient financial crime compliance systems, constantly adapted to international regulations, with the capacity to confront new techniques deployed by criminal organizations. As a part of the second line of defense, the FCCFinancial Crime Compliance (FCC) function ensures that risks are managed in accordance with the risk appetite defined by the Bank and promotes a strong risk culture through the organization. The FCC function is ultimately responsible for supervising and coordinating the FCC systems in collaboration with the business units and control areas, requiring the implementation of the necessary programs, measures and enhancements. The Bank anti-money laundering (AML) and countering terrorism financing (CTF) policy is based on three main pillars: comply with the highest international standards, their adaptation and to establish global policies and technology systems to facilitate such compliance. Reputational risk Reputational risk is defined in the Bank as the risk of a current or potential negative economic impact due to damage to the perception of the Bank on the part of employees, customers, shareholders and investors, and the wider community. Reputational risk may arise from a multitude of sources and in many cases from other risks. In general, these sources may be related to the Bank's business and support activities, the economic, social and political environment and events associated with our competitors. Consequently, the management of this risk requires interaction with both first and second lines of defense functions responsible for the relationship with stakeholders, in order to ensure a consolidated oversight of the risk, efficiently supported on the current control frameworks. The reputational risk model is based on a prominently preventive approach to risk management and control, and on effective processes for the identification and management of early warnings of events and risks, and subsequent monitoring and management of events and detected risks.
Transformation and improvement projects
In accordance with the organizational principles defined in the function, transversal functions support specialized vertical functions, providing them with methodologies and resources, management systems and information and support in executing multidisciplinary projects and activities, among them:
| ● | Development of AML risk assessment methodologies. This initiative aims to provide the Bank with new tools to help identify, measure and control the risks of money laundering. Through the development of statistical models or by expert judgment, the Bank is able to have information that allows it to focus its efforts to prevent these crimes. These developments rely heavily on data analytics functions. |
| ● | Analytic process. This initiative aims to provide the Bank with tools to help in its information analytical projects. It has the ability to massively analyze information with big data tools, process the information with different programming languages, and finally execute advanced analyzes. |
| ● | Transaction monitoring. The transaction monitoring process is one of the most time-consuming activities, due to the high number of alerts, an area where previous expertise domain, rules, conditions and thresholds define the risk that the Bank would like to control. |
g) Model risk 1. Introduction A model is defined as a system, approach or quantitative method that applies theories, techniques or statistical, economic, financial or mathematical hypotheses to transform input data into quantitative estimates. The models are simplified representations of real world relationships between characteristics, values and observed assumptions. This simplification allows the Bank to focus attention on specific aspects which are considered most important for applying a given model. The Bank uses models for different purposes such as admission (scoring/rating), capital calculation, behavior, provisions, market and operational risk, compliance, liquidity, among others. The use of all those models entails model risk, defined as the potential negative consequences arising from decisions based on the results of wrong, inadequate or incorrectly used models. According to this definition, the sources of model risk are as follows: | ● | The model itself, due to the utilization of incorrect or incomplete data, or due to the modelling method used and its implementation in systems. |
| ● | Incorrect use of the model. |
The materialization of model risk may cause financial loss, erroneous commercial and strategic decision-making or damage to the Bank’s transactions. The Bank has been working towards the definition, management and control of model risk for several years. In 2015, a specific area was established within the Risk area in order to manage and control this risk. To ensure adequate model risk management, the Bank has in place a set of policies and procedures which establish the principles, responsibilities and processes to follow during the model life cycle detailing aspects related to organization, governance, model management and model validation, among others. The supervision and control of model risk is proportional to the importance of each model. In this sense, a concept of ‘Tiering’ is defined as the main attribute used to synthesize the model’s level of importance or
model significance, this criteria defines the intensity of the risk management processes that must be followed. The model risk management is organized around four pillars: | ● | Key elements: Governance, risk appetite, management scope and risk policies. |
| ● | Processes: Model life cycle. |
| ● | Communication: Internal and external communication (monitoring, reports, training, among others). |
| ● | Model Risk Facilitators: Infrastructure, tools and resources. |
2. Model risk management Model risk management and control is structured around a set of processes regarded as the model life cycle. The definition of the model life cycle phases in the Bank is outlined as follows: Identification As soon as a model is identified, it is necessary to ensure that it is included in the model risk control perimeter. One key feature for a proper model risk management is to have a complete inventory of the models used. The Bank has a centralized inventory, created based on a uniform taxonomy for all models used at the different business units. The inventory contains all relevant information for each model, which allows them to be monitored properly according to their relevance and the tier criteria. Planning This is an internal annual exercise, approved by the Bank’s governance bodies, which aims to establish a strategic action plan for all models included in the scope of management of the Model Risk function. It identifies the needs for resources related to the models that are going to be developed, revised and implemented during the year. Development This is the model’s construction phase, based on the needs established in the models plan and with the information provided by the specialists for that purpose. The development must take place using common standards for the Bank. This ensures the quality of the models used for decision-making purposes. Internal validation Independent validation of models is not only a regulatory requirement, but it is also a key feature for proper management and control of the Bank’s model risk. Hence, there is a specialized unit, independent from developers and users, which draws up technical opinions on the suitability of internal models, and sets out conclusions concerning their robustness, utility and effectiveness. The validation opinion for each model is expressed through a rating, which summarizes the model risk associated with it.
The internal validation process covers all models within the model risk control scope, ranging from those used in the Risk function (credit, market, structural or operational risk models, capital models, economic and regulatory models, provision models, stress tests, among others) to other models used in different functions that support decision-making. The validation scope includes not only more theoretical or methodological aspects, but also the IT systems and the data quality that models rely upon for their effective functioning. In general, it includes all relevant aspects related to Risk management (controls, reporting, uses, involvement of senior management, among others). One of the key tasks related to the internal validation is the consistency analysis process carried out by the different validators, which includes the review of the issued recommendations, their severity and the rating assigned. In this way, it acts as an important point of control of the consistency and comparability of the validation works. The validation works are only concluded once this phase of consistency has been completed. Approval Before being deployed and therefore used, each model must be submitted for approval to the corresponding governance bodies. Deployment and use This is the phase during which the newly developed model is implemented in the system in which it will be used. As mentioned already, this implementation phase is another possible source of model risk. It is therefore essential that tests be conducted by technical units and the model owners to certify that the model has been implemented pursuant to its methodological definition and that it works and performs as expected. Monitoring and control Models have to be regularly reviewed to ensure correct performance and that they are suitable for purpose. Otherwise, they must be adapted or redesigned. Additionally, control teams have to ensure that the model risk is managed in accordance with the principles and rules set out in the model risk framework and all related internal regulations. Model Decommissioning A model decommissioning can be driven by different causes, such as the model is not performing appropriately, the model has been inactive for a considerable amount of time or there is a new model replacing a current one. h) Strategic risk 1. Introduction Strategic risk is the risk of loss or damage arising from strategic decisions or their poor implementation, or from the inability to adapt to external developments. The Bank’s business model must be considered as key factor that is pivotal to strategic risk. It has to be viable and sustainable; therefore, it must be able to generate results in accordance with the Bank’s targets, every year and at least during the following three years, as well as being consistent with the Bank’s long-term view.
Strategic risk can be split into three main components: | ● | Business model risk: the risk associated with the Bank’s business model. This includes, among others, the risk of the model becoming obsolete, irrelevant, and/or that it loses value to generate expected results. |
| ● | Strategy design risk: the risk related to the strategy set out in the Bank’s long-term strategic plan, including the risk that this plan may not be adequate per se, or due to its assumptions, and thus resulting in the Bank may not be able to deliver expected results. |
| ● | Strategy execution risk: the risk associated with the execution of the three-year financial plan. Risks considered within this component include potential impacts due to both internal and external factors, the inability to react to changes in the business environment, and risks associated with corporate development transactions. |
2. Strategic risk management Strategic risk is viewed as a transversal risk and a Bank target-operating model that is used as a reference by the Bank’s business units. This model encompasses the procedures and necessary tools for robust monitoring and control, which can be summarized as follows: | ● | Strategic plans: the Strategic risk function, with the support of the different areas within the Risk area, independently monitors and challenges the risk management activities performed by the Bank’s Corporate Development and Strategy function. It is an additional component, albeit independent, that is fully integrated in all the Bank’s strategic plans. |
| ● | Corporate development transactions: the Strategic risk function, with the support of the different areas in the Risk area, ensures that corporate development transactions are subject to a risk assessment that comprises their potential impact on both Bank’s risk profile and risk appetite. |
| ● | Top risks: under stressed assumptions, the Bank identifies, evaluates, monitors and proactively manages those risks that may have a significant impact on its results, liquidity or capital affecting its financial health. |
| ● | New products commercialization: The Strategic risk function participates in the process of assessing and validating any new product or service proposal before it is launched on the market by the Bank ensuring full alignment with the defined strategy. |
| ● | Strategic risk report: prepared jointly by the Bank’s Corporate Development and Strategic risk function, as a combined tool for the monitoring and assessment of the Bank’s strategy, in addition to associated risks. This report is presented to the Bank’s Management and covers several topics: strategy execution, strategic projects, corporate development transactions, business model performance, top risks and risk profile. |
Climate change may imply three primary drivers of financial risk that could adversely affect the Bank:
| - | Transition risks associated with the move to a low carbon economy, both at idiosyncratic and systemic levels, such as through policy, regulatory and technological changes. |
| - | Physical risks related to extreme weather impacts and longer term trends, which could result in financial losses that could impair asset values and the creditworthiness of our customers. |
| - | Liability risks derived from parties who may suffer losses from the effects of climate change and may seek compensation from those they hold responsible such as state entities, regulators, investors and lenders. |
These primary drivers could materialize, among others, in the following financial risks: | - | Credit risks: Physical climate change could lead to increased credit exposure and companies with business models that are not aligned with the climate change may face increased risk of reduced corporate earnings and business disruption due to new regulations or changes in the market. |
| - | Market risks: Market changes in the most carbon intensive sectors could affect energy and commodity prices, corporate bonds, equities and certain derivatives contracts. Increasing frequency of severe weather events could affect macroeconomic conditions, weakening fundamental factors such as economic growth, employment and inflation. |
| - | Operational risks: Severe weather events could directly impact business continuity and operations both of customers and ours. |
| - | Reputational risk could also arise from shifting sentiment among customers and increasing attention and scrutiny from other stakeholders (investors, regulators, etc.) on our response to climate change. |
Any of the conditions described above could have a material adverse effect on the Bank´s business, financial condition and results of operations. Additionally, the Bank has increased focus on the impact of climate risk in relation to market, structural and liquidity risk, which arise from the possibility that changes in climate may adversely affect the value of a financial instrument, a portfolio or the Bank as a whole. This risk may have an impact both on financial instruments fair value or portfolios and on the Bank's liquidity. The Bank measures this risk through stress scenarios for both market and liquidity risk, which arises from the possibility that climate change may adversely affect the value of a financial instrument, a portfolio or the Bank as a whole. As of December 31, 2022, the Bank has not identified any material impact related to climate change in the consolidated financial statements. In view of the business activities carried on by the Bank, the Bank does not have any environmental liability, expenses, assets, provisions or contingencies that might be material with respect to its consolidated equity, financial position or results. Therefore, no specific disclosures relating to environmental issues are included in these consolidated financial statements. 49. Associated entities and consolidated subsidiaries a) Associated entities | | | | | | | | | | |
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| Santander Merchant Platform Solutions México, S.A. de C.V.
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| Merchant Business
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| Mexico City
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| 49%
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Following is a summary of the financial informationbalance sheet on the associated entity as of December 31, 2020:2021: | | | | | | | | | | | | | 20202021
| | | | | | | | | | | | Current assets | | | 5025,678
| | Non-current assets | | | 4913,549
| | Current liabilities | | | (290)(6,119)
| | Non-current liabilities | | | (25)(31)
| | Net assets | | | 6783,077
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Following is a summary of the income statement on the associated entity as of December 31, 2021: | | | | | | | | | | | | | 2021
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| 2020
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| | | | | | | | | | Revenue | | | 1,8342,399
| | Expenses | | | (1,464)(1,728)
| | Operating profit before tax | | | 370671
| | Income tax | | | (7)(178)
| | Profit for the year | | | 363493
| | Other comprehensive income
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| Total comprehensive income
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| 363
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As of December 31, 2020,2021 and 2022 the income accounted for usingby the equity method recognized in the consolidated income statement was 178200 million pesos.pesos and 182 million pesos, respectively. The table below provideprovides the reconciliation of the carrying amount of the investment in associated entities recognized in the consolidated balance sheet as of December 31, 2020:2021: | | | | | | | | | | | | | 20202021
| | | | | | | | | | | | Reconciliation to carrying amount: | | | | | Net assets on investment date | | | 3152,584
| | Profit for the period | | | 363493
| | Closing net assets | | | 6783,077
| | Bank’s share in associated entity (percentage) | | | 49 | % | Bank’s share in associated entity | | | 3321,508
| | Goodwill | | | 669 | | Sale of merchant contracts | | | (784) | | Other adjustments | | | (13) | | Carrying amount as of December 31 2020 | | | 1,0011,380
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As mentioned in Note 3, during 2021 Banco Santander México sold acquisition contracts to SMPS (associated entity) for 1,600 million pesos. In accordance with IAS 28, the Bank recognized in the consolidated income statement a gain on the sale in the amount of 816 million pesos, with a corresponding credit to the investment in associated entity for 784 million. The Bank received 583 million in cash and a note receivable from SMPS in the amount of 1,017 million as proceeds from the sale of the acquisition contracts. The note receivable was subsequently capitalized as a capital contribution to SMPS.
COVID-19 pandemic did not trigger any indication that investments in associated entities may be impaired as of December 31, 2020.
b) Composition of the Bank The subsidiaries of Banco Santander México, all of which have been included in the consolidated financial statements as of December 31, 2020,2022, are as follows: | | | | | | | | | | | | | | | | | | | | | | | | Proportion of | | | Proportion of | | | | | | | Proportion of | | | Proportion of | | | | | | | | ownership interest | | | voting power | | | | | | | ownership interest | | | voting power | | Name of subsidiary | | | Principal activity | | | held by the Bank | | | held by the Bank | | | | Principal activity | | | held by the Bank | | | held by the Bank | | Santander Consumo, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada | | | Credit card loans | | | 99.99 | % | | 100 | % | | | Credit card loans | | | 99.99 | % | | 100 | % | Santander Inclusión Financiera, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada | | | Retail loans | | | 99.99 | % | | 100 | % | | | Retail loans | | | 99.99 | % | | 100 | % | Centro de Capacitación Santander, A.C. | | | Not-for-profit (Educational institute) | | | 99.99 | % | | 100 | % | | | Not-for-profit (Educational institute) | | | 99.99 | % | | 100 | % | Fideicomiso 100740 Banco Santander, S.A. | | | Settlement trust | | | 99.99 | % | | 100 | % | | | Settlement trust | | | 99.99 | % | | 100 | % | Fideicomiso GFSSLPT, Banco Santander, S.A. | | | Settlement trust | | | 89.14 | % | | 100 | % | | | Settlement trust | | | 89.14 | % | | 100 | % | Santander Servicios Corporativos, S.A. de C.V. | | | Services | | | 99.99 | % | | 100 | % | | | Services | | | 99.99 | % | | 100 | % | Santander Servicios Especializados, S.A. de C.V. | | | Services | | | 99.99 | % | | 100 | % | | | Services | | | 99.99 | % | | 100 | % | Santander Tecnología México, S.A. de C.V. | | | Technology services | | | 99.99 | % | | 100 | % | | | Technology services | | | 99.99 | % | | 100 | % | Fideicomiso Irrevocable F/00361 | | | Settlement trust | | | 99.99 | % | | 100 | % | | Openbank Santander México, S.A. de C.V., Sociedad Financiera de Objeto Múltiple, Entidad Regulada | | | Financial services | | | 99.99 | % | | 100 | % | | | Financial services | | | 99.99 | % | | 100 | % |
Until December 31, 2019, Banco Santander México had 99.99% of proportion of ownership interest held of Santander Vivienda and during 2019, Banco Santander México obtained the authorization to carry out a merger through absorption between Banco Santander México and Santander Vivienda with the former being the surviving entity and the latter being the merged entity (see Notes 3 and 29.d).
The total non-controlling interest recognized in the consolidated balance sheet as of December 31, 2020,2022, amounts to 3762 million pesos. Information in respect to non-controlling interest is presented in Note 27. c) Significant restrictions The Bank has the following significant restrictions on its ability to access or use the consolidated assets and settle the consolidated liabilities as of December 31, 2020:2022: | ● | Compulsory deposits with the Central Bank |
Compulsory deposits relate to a minimum balance financial institutions are required to maintain with the Central Bank based on a percentage of deposits received by third parties. The amount of this compulsory deposit is 23,978 million pesos (see Note 6). | ● | Reverse repurchase agreements |
70,356121,859 million pesos of debt instruments have been received as collateral in connection with reverse repurchase agreement transactions (see Notes 7 and 11).
129,240119,213 million pesos of Mexican government securities (M Bonds, BPATs,BPATS, UMS and other debt securities) classified as financial assets at fair value through other comprehensive income have been pledged in connection with repurchase agreements transactions (see Note 8).
201,44786,052 million pesos of debt instruments classified as financial assets at fair value through profit or loss have been pledged in connection with repurchase agreement transactions (see Note 8).
7,7067,720 million pesos of BREMS R classified as financial assets at amortized cost have been pledged in connection with repurchase agreements transactions (see Note 8).
3,6882,211 million pesos of Special CETES in connection with the program of credit support and additional benefits to Mexican States and Municipalities and the support program for housing loan debtors, which can only be repurchased by the Central Bank (see Note 8).
7,7857,799 million pesos of BREMS R that can only be acquired by Mexican banks through auctions carried out by the Central Bank as well as through repurchase agreement transactions between them or between Mexican banks as per the provisions established by the Central Bank (see Notes 3.4 and 8).
There were not Mexican Government Bonds pledged in connection with repurchase agreements transactions (see Note 8).
There were not Mexican Government Bonds pledged in connection with securities loan transactions (see Note 8).
10,729410 million pesos of Mexican government securities (CETES and UDIBONDS) have been pledged in connection with securities loan transactions (see Note 8).
There are no equity instruments pledged in connection with securities loans transactions (see Note 9).
1371 million pesos of equity instruments have been received in connection with securities loan transactions (see Note 9).
| ● | Collaterals in financial derivatives transactions traded in organized markets |
4,1236,530 million pesos of loans and advances to customers have been pledged in connection with financial derivatives traded in organized markets (see Note 11).
| ● | Collaterals in OTC financial derivatives transactions |
27,95414,585 million pesos of loans and advances to credit institutions have been pledged in connection with OTC financial derivatives transactions (see Note 7).
5,3061,417 million pesos of debt instruments classified as financial assets at fair value through profit or loss have been pledged in connection with OTC financial derivatives transactions (see Note 8).
27,95415,676 million pesos of deposits from credit institutions and customer deposits have been received in connection with OTC financial derivatives transactions (see Note 32).
5,4835,660 million pesos of debt instruments have been received in connection with OTC financial derivatives transactions (see Note 32).
The Bank has restrictions on earnings distribution related to the legal reserve of 14,34616,365 million pesos that include 11,21713,971 million pesos in legal reserve of Banco Santander México on an individual basis (see Note 45). In addition, the Bank is restricted from distributing dividends that will result in non-compliance with minimum capitalization requirements established by the CNBV (see Note 30). | ● | Loans to other entities within the Bank |
The Bank granted a loan to Santander Consumo and Santander Inclusion Financiera for 38,50069,785 million pesos and 343485 million pesos, respectively, which were eliminated from the consolidated balance sheet for consolidation purposes. d) Financial support The Bank did not give any financial support to a consolidated structured entity during 20192021 and 2020.2022. *****
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