20-F 1 d914402d20f.htm 20-F 20-F
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 2015

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20–F

 

 

(Mark One)

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

or

 

x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2014

or

 

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

for the transition period from                      to                     

or

 

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

Date of event requiring this Shell Company Report                     

Commission File Number 000-30852

 

 

GRUPO FINANCIERO GALICIA S.A.

(Exact name of Registrant as specified in its charter)

 

 

GALICIA FINANCIAL GROUP

(Translation of Registrant’s name into English)

REPUBLIC OF ARGENTINA

(Jurisdiction of incorporation or organization)

Grupo Financiero Galicia S.A.

Tte. Gral. Juan D. Perón 430

C1038 AAJ-Buenos Aires, Argentina

(Address of principal executive offices)

Pedro A. Richards, Chief Executive Officer

Tel: 54 11 4 343 7528 / Fax: 54 11 4 331 9183, prichards@gfgsa.com

Perón 430, 25° Piso C1038AAJ Buenos Aires ARGENTINA

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

American Depositary Shares, each representing ten Class B ordinary Shares

 

Name of each exchange on which registered

Nasdaq Capital Market

Title of each class

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

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

Class A Ordinary Shares, Ps.1.00 par value

     281,221,650   

Class B Ordinary Shares, Ps.1.00 par value

     1,019,042,947   

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and larger accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

  

             International Financial Reporting Standards

As issued by the International Accounting Standards Board  ¨

   Other  x

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Item 1. Identity of Directors, Senior Management and Advisers

     4   

Item 2. Offer Statistics and Expected Timetable

     4   

Item 3. Key Information

     4   

Item 3.A. Selected Financial Data

     4   

Exchange Rate Information

     6   

Item 3.B. Capitalization and Indebtedness

     7   

Item 3.C. Reasons for the Offer and Use of Proceeds

     7   

Item 3.D. Risk Factors

     7   

Item 4. Information on the Company

     18   

History and Development of the Company

     18   

Organizational Structure

     18   

History

     20   

Business

     28   

Competition

     37   

Sales and Marketing

     39   

Property

     41   

Capital Investments and Divestitures

     42   

Selected Statistical Information

     43   

Government Regulation

     73   

Argentine Banking Regulation

     78   

Credit Cards Regulation

     87   

Concealment and Laundering of Assets of a Criminal Origin

     88   

Item 4.A. Unresolved Staff Comments

     89   

Item 5. Operating and Financial Review and Prospects

     89   

Item 5.A. Operating Results

     89   

Overview

     89   

The Argentine Economy

     90   

The Argentine Financial System

     92   

The Argentine Insurance Industry

     92   

Inflation

     93   

Currency Composition of Our Balance Sheet

     93   

Results of Operations for the Fiscal Years Ended December 31, 2014, December  31, 2013 and December 31, 2012

     94   

U.S. GAAP and Argentine Banking GAAP Reconciliation

     108   

Results by Segments

     114   

Consolidated Assets

     122   

Exposure to the Argentine Public Sector

     123   

Funding

     124   

Contractual Obligations

     129   

Off-Balance Sheet Arrangements

     131   

Critical Accounting Policies

     132   

U.S. GAAP - Critical Accounting Policies

     133   

Principal Trends

     137   

Item 5.B. Liquidity and Capital Resources

     138   

Liquidity - Holding Company on an Individual Basis

     138   

Consolidated Cash Flows

     140   

Banco Galicia’s Liquidity Management

     142   

Capital

     144   

Capital Expenditures

     144   

Item 5.E. Off-Balance Sheet Arrangements

     144   

Item 5.F. Contractual Obligations

     144   

Item 6. Directors, Senior Management and Employees

     144   

 

(i)


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TABLE OF CONTENTS

(continued)

 

     Page  

Our Board of Directors

     144   

Our Audit Committee

     147   

Our Supervisory Committee

     147   

Compensation of Our Directors

     148   

Management of Grupo Financiero Galicia

     149   

Board of Directors of Banco Galicia

     149   

Functions of the Board of Directors of Banco Galicia

     151   

Banco Galicia’s Executive Officers

     153   

Banco Galicia’s Supervisory Committee

     156   

Compensation of Banco Galicia’s Directors and Officers

     156   

Employees

     157   

Nasdaq Corporate Governance Standards

     158   

Share Ownership

     160   

Item 7. Major Shareholders and Related Party Transactions

     160   

Major Shareholders

     160   

Related Party Transactions

     161   

Item 8. Financial Information

     163   

Legal Proceedings

     164   

Dividend Policy and Dividends

     166   

Significant Changes

     167   

Item 9. The Offer and Listing

     168   

Shares and ADSs

     168   

Argentine Securities Market

     170   

Market Regulations

     170   

Item 10. Additional Information

     171   

Description of Our Bylaws

     171   

Exchange Controls

     178   

Taxation

     178   

Material Contracts

     185   

Documents on Display

     186   

Item 11. Quantitative and Qualitative Disclosures About Market Risk

     186   

General

     186   

Interest Rate Risk

     187   

Foreign Exchange Rate Risk

     190   

Currency Mismatches

     191   

Market Risk

     193   

Cross-border Risk

     194   

Overseas Foreign Currency Transfer Risk

     194   

Risk Exposures in the Non-financial Public Sector

     194   

Operational Risk

     195   

Item 12. Description of Securities Other Than Equity Securities

     196   

Item 12.D. American Depositary Shares

     196   

Fees and Charges Applicable to ADS Holders

     196   

Fees and Direct and Indirect Payments Made by the Depositary to Us

     197   

Item 13. Defaults, Dividend Arrearages and Delinquencies

     198   

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     198   

Item 15. Controls and Procedures

     198   

Item 16.A. Audit Committee Financial Expert

     199   

Item 16.B. Code of Ethics

     199   

Item 16.C. Principal Accountants’ Fees and Services

     199   

Item 16.D. Exemptions from the Listing Standards for Audit Committees

     200   

Item 16.E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     200   

 

(ii)


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TABLE OF CONTENTS

(continued)

 

     Page  

Item 16.H. Mine Safety Disclosure

     200   

Item 17. Financial Statements

     201   

Item 18. Financial Statements

     201   

Item 19. Exhibits

     201   

 

(iii)


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PRESENTATION OF FINANCIAL INFORMATION

Grupo Financiero Galicia S.A. (“Grupo Financiero Galicia” or “Grupo Galicia”) is a financial services holding company incorporated in Argentina and is one of Argentina’s largest financial services groups. In this annual report, references to “we”, “our”, and “us” are to Grupo Financiero Galicia and its consolidated subsidiaries, except where otherwise noted. Our consolidated financial statements consolidate the accounts of the following companies:

 

    Grupo Financiero Galicia;

 

    Banco de Galicia y Buenos Aires S.A. (“Banco Galicia” or “the Bank”), our largest subsidiary, consolidated with (i) Banco Galicia Uruguay S.A. (in liquidation) (“Galicia Uruguay”), (ii) Galicia Cayman S.A. (“Galicia Cayman”), only until September 30, 2014 as on October 1 it was merged into Banco Galicia, (iii) Tarjetas Regionales S.A. (“Tarjetas Regionales”) and its operating subsidiaries, (iv) Tarjetas del Mar S.A. (“Tarjetas del Mar”), (v) Galicia Valores S.A., (vi) Galicia Administradora de Fondos S.A. Sociedad Gerente de Fondos Comunes de Inversión (“Galicia Administradora de Fondos”) but only until March 31, 2014, as in April it was sold to Grupo Financiero Galicia, (vii) Compañía Financiera Argentina S.A. (“Compañía Financiera Argentina” or “CFA”) and (viii) Cobranzas y Servicios S.A. (collectively, “Banco Galicia” or the “Bank” except where otherwise noted);

 

    Sudamericana Holding S.A. (“Sudamericana”) and its subsidiaries;

 

    Galicia Warrants S.A. (“Galicia Warrants”);

 

    Net Investment S.A. (“Net Investment”);

 

    Galicia Administradora de Fondos (consolidated with Grupo Financiero Galicia since April 2014); and

 

    Galval Agente de Valores S.A. (“Galval”), the results of which were consolidated only during the first half of fiscal year 2012, since on September 4, 2012, the Board of Directors of Grupo Financiero Galicia (the “Board of Directors”) approved the sale of 100% of its interest in Galval. Such transaction was approved by the Central Bank of Uruguay in June 2013 and was consummated on June 12, 2013.

We maintain our financial books and records in Argentine Pesos and prepare our financial statements in conformity with the accounting rules of the Argentine Central Bank, which entity prescribes the generally accepted accounting principles for all financial institutions in Argentina. This annual report refers to those accounting principles as “Argentine Banking GAAP”. Argentine Banking GAAP differs in certain relevant respects from generally accepted accounting principles in Argentina, which we refer to as “Argentine GAAP”. Argentine Banking GAAP also differs in certain significant respects from the generally accepted accounting principles in the United States, which we refer to as “U.S. GAAP”. See Note 33 to our audited consolidated financial statements included in this annual report for a description of the differences between Argentine GAAP and Argentine Banking GAAP, and Note 36 to our audited consolidated financial statements included in this annual report for a discussion of the principal differences between Argentine Banking GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of our net income for the three fiscal years ended December 31, 2014 and total shareholders’ equity as of December 31, 2014 and 2013, and Item 5. “Operating and Financial Review and Prospects” - Item 5.A. “Operating Results-U.S. GAAP and Argentine Banking GAAP Reconciliation”.

In this annual report, references to “US$” and “Dollars” are to United States Dollars and references to “Ps.” or “Pesos” are to Argentine Pesos. The exchange rate used in translating Pesos into Dollars and used in calculating the convenience translations included in the following tables is the “Reference Exchange Rate” which is published by the Argentine Central Bank and which was Ps.8.5520, Ps.6.5180 and Ps.4.9173 per US$1.00 as of December 31, 2014, December 31, 2013 and December 31, 2012, respectively. The exchange rate translations contained in this annual report should not be construed as representations that the stated Peso amounts actually represent or have been or could be converted into Dollars at the rates indicated or at any other rate.

Our fiscal year ends on December 31, and references in this annual report to any specific fiscal year are to the twelve-month period ended December 31 of such year.

Unless otherwise indicated, all information regarding deposit and loan market shares and other financial industry information has been derived from information published by the Argentine Central Bank.

We have expressed all amounts in millions of Pesos, except percentages, ratios, multiples and per-share data.


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Certain figures included in this annual report have been rounded for case of presentation. Percentage figures included in this annual report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this annual report may vary from those obtained by performing the same calculations using the figures in the financial statements. Certain numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceeded them due to rounding.

FORWARD LOOKING STATEMENTS

This annual report contains forward-looking statements that involve substantial risks and uncertainties, including, in particular, statements about our plans, strategies and prospects under the captions Item 4. “Information on the Company-Capital Investments and Divestitures,” Item 5. “Operating and Financial Review and Prospects”-Item 5.A. Operating Results-Principal Trends” and Item 5.B. “Liquidity and Capital Resources.” All statements other than statements of historical facts contained in this annual report (including statements regarding our future financial position, business strategy, budgets, projected costs and management’s plans and objectives for future operations) are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of such words as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “continue” or other similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, no assurance can be provided with respect to these statements. Because these statements are subject to risks and uncertainties, actual results may differ materially and adversely from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially and adversely from those contemplated in such forward-looking statements include but are not limited to:

 

    changes in Argentine government regulations applicable to financial institutions, including tax regulations and changes in or failures to comply with banking or other regulations;

 

    changes in general political, legal, social or other conditions in Argentina, Latin America or abroad;

 

    fluctuations in the Argentine rate of inflation;

 

    changes in capital markets in general that may affect policies or attitudes toward lending to Argentina or Argentine companies, including expected or unexpected turbulence or volatility in domestic or international financial markets;

 

    changes in the macroeconomic situation at the regional, national or international levels, and the influence of these changes on the microeconomic conditions of the financial markets in Argentina;

 

    increased competition in the banking, financial services, credit card services, insurance, asset management, mutual funds and related industries;

 

    changes in interest rates which may, among other things, adversely affect margins;

 

    a loss of market share by any of Banco Galicia’s main businesses;

 

    a change in the credit cycle, increased borrower defaults and/or a decrease in the fees charged to clients;

 

    Banco Galicia’s inability to sustain or improve its performance;

 

    Banco Galicia’s inability to obtain additional debt or equity financing on attractive conditions or at all, which may limit its ability to fund existing operations and to finance new activities;

 

    technological changes and changes in Banco Galicia’s ability to implement new technologies;

 

    changes in the saving and consumption habits of its customers and other structural changes in the general demand for financial products, such as those offered by Banco Galicia;

 

    possible financial difficulties of the Argentine government;

 

    volatility of the Peso and the exchange rates between the Peso and foreign currencies; and

 

    other factors discussed under Item 3. “Key Information” - Item 3.D. “Risk Factors” in this annual report.

You should not place undue reliance on forward-looking statements, which speak only as of the date that they were made. Moreover, you should consider these cautionary statements in connection with any written or oral

 

-2-


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forward-looking statements that we may issue in the future. We do not undertake any obligation to release publicly any revisions to forward-looking statements after completion of this annual report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and are not guarantees of future performance.

 

-3-


Table of Contents

PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

Not applicable.

 

Item 3. Key Information

 

Item 3.A. Selected Financial Data

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

Our financial statements do not include any effect for inflation accounting other than the adjustments to non-monetary assets through February 28, 2003.

The selected consolidated financial information as of December 31, 2014, and December 31, 2013, and for the fiscal years ended December 31, 2014, and 2013, has been derived from our audited consolidated financial statements included in this annual report. The selected consolidated financial information as of December 31, 2012, December 31, 2011, and December 31, 2010, and for the fiscal years ended December 31, 2012, December 31, 2011, and December 31, 2010, has been derived from our audited consolidated financial statements not included in this annual report.

You should read this data in conjunction with Item 5. “Operating and Financial Review and Prospects” and our audited consolidated financial statements included in this annual report.

 

     Fiscal Year Ended December 31,  
     2014     2014     2013     2012     2011     2010  
    

(in millions
of Dollars,
except as
noted)(1)

Unaudited

    (in millions of Pesos, except as noted)(1)  

Consolidated Income Statement in Accordance with Argentine Banking GAAP

            

Financial Income

     2,322        19,860        13,076        9,129        6,018        3,615   

Financial Expenses

     1,207        10,321        6,170        3,941        2,274        1,413   

Net Financial Income (2)

     1,115        9,539        6,906        5,188        3,744        2,202   

Provision for Losses on Loans and Other Receivables

     282        2,411        1,776        1,347        843        552   

Income before Taxes

     623        5,330        3,056        2,125        1,861        667   

Income Tax

     (233     (1,992     (1,232     (789     (754     (258
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income / (Loss)

  390      3,338      1,824      1,336      1,107      409   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings / (Loss) per Share (in Pesos)

  0.30      2.57      1.45      1.08      0.89      0.33   

Diluted Earnings / (Loss) per Share (in Pesos)

  0.30      2.57      1.45      1.08      0.89      0.33   

Cash Dividends per Share (in Pesos)

  —        —        0.03      0.02      0.01      0.02   

Stock Dividends per Share (in Pesos)

  —        —        —        —        —        —     

Book Value per Share (in Pesos)

  0.92      7.88      5.34      3.92      2.86      1.99   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in Accordance with U.S. GAAP

Net Income / (Loss)

  410      3,504      1,575      1,310      867      2,294   

Basic and Diluted Earnings / (Losses) per Share (in Pesos)

  0.32      2.70      1.27      1.06      0.70      1.85   

Book Value / (Deficit) per Share (in Pesos)

  0.92      7.88      5.34      4.12      3.12      2.41   

Financial Income

  2,342      20,032      13,109      9,187      5,986      4,778   

Financial Expenses

  1,209      10,343      6,178      3,923      2,241      1,343   

Net Financial Income / (Loss)

  1,133      9,689      6,931      5,264      3,745      3,435   

Provision for Losses on Loans and Other Receivables

  281      2,400      1,795      1,338      888      550   

Income Tax

  221      1,890      1,176      780      679      508   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Balance Sheet in Accordance with Argentine Banking GAAP

Cash and Due from Banks

  1,983      16,959      12,560      8,345      6,419      5,646   

Government Securities, Net

  1,170      10,010      3,987      3,627      5,228      2,268   

Loans, Net

  7,789      66,608      55,265      42,593      30,905      21,354   

Total Assets

  12,548      107,314      83,156      63,458      51,193      35,708   

Deposits

  7,562      64,666      51,395      39,945      30,135      22,223   

Other Funds (3)

  3,789      32,402      24,814      18,643      17,506      11,015   

Total Shareholders’ Equity

  1,198      10,246      6,947      4,870      3,552      2,470   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average Total Assets (4)

  10,817      92,510      69,844      54,416      41,636      29,118   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Period-end Balance Sheet Items

Denominated in Dollars:

Loans, Net of Allowances

  4.20      4.20      5.27      6.32      13.88      14.53   

Total Assets

  12.11      12.11      11.74      11.42      15.15      18.98   

Deposits

  7.46      7.46      7.15      7.84      15.05      18.08   

Total Liabilities

  13.61      13.61      13.71      14.29      23.57      23.01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in Accordance with U.S. GAAP

Trading Securities

  1,231      10,530      3,326      3,450      5,310      2,700   

Available-for-Sale Securities

  504      4,313      4,819      3,251      2,882      2,385   

Total Assets

  14,078      120,393      92,729      72,398      55,957      40,594   

Total Liabilities

  12,880      110,150      85,785      67,290      52,081      37,597   

Shareholders’ Equity (Deficit)

  1,198      10,243      6,944      5,108      3,876      2,997   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

-4-


Table of Contents
    Fiscal Year Ended December 31,  
    2014     2013     2012     2011     2010  
    (in millions of Pesos, except as noted)(1)  

Selected Ratios in Accordance with Argentine Banking GAAP

         

Profitability and Efficiency

         

Net Yield on Interest Earning Assets (5)

    14.42     13.77     14.14     13.27     11.38

Financial Margin (6)

    13.56        12.75        12.11        11.72        10.02   

Return on Average Assets (7)

    3.85        2.91        2.80        3.07        1.76   

Return on Average Shareholders’ Equity (8)

    39.07        32.47        32.12        37.39        18.63   

Net Income from Services as a Percentage of Operating Income (9)

    37.40        38.03        38.15        39.57        44.73   

Efficiency ratio (10)

    60.51        66.65        68.84        67.88        71.42   

Capital

         

Shareholders’ Equity as a Percentage of Total Assets

    9.55     8.35     7.67     6.94     6.92

Total Liabilities as a Multiple of Shareholders’ Equity

    9.47     10.97      12.03      13.41      13.46 

Total Capital Ratio

    15.91     14.28     13.02     12.63     15.19

Liquidity

         

Cash and Due from Banks as a Percentage of Total Deposits

    26.23     24.44     20.89     21.30     25.40

Loans, Net as a Percentage of Total Assets

    62.07        66.46        67.12        60.37        59.80   

Credit Quality

         

Past Due Loans (11) as a Percentage of Total Loans

    2.61     2.69     2.53     1.82     2.57

Non-Accrual Loans (12) as a Percentage of Total Loans

    3.57        3.57        3.37        2.63        3.37   

Allowance for Loan Losses as a Percentage of Non-accrual Loans (12)

    105.78        103.80        115.85        152.01        137.57   

Net Charge-Offs (13) as a Percentage of Average Loans

    2.81        2.33        2.00        1.49        2.38   

Ratios in Accordance with U.S. GAAP

         

Capital

         

Shareholders’ Equity (deficit) as a Percentage of Total Assets

    8.51        7.49        7.06        6.93        7.38

Total Liabilities as a Multiple of Total Shareholders’ Equity

    10.75      12.35      13.17      13.44      12.54 

Liquidity

         

Loans, Net as a Percentage of Total Assets

    55.29     59.43     58.74     55.06     52.56

Credit Quality

         

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

    129.78        127.05        138.77        202.23        163.37   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Inflation and Exchange Rate

Wholesale Inflation (14)

  28.3   14.8   13.1   12.7   14.6

Consumer Inflation (15)

  23.9   11.0   10.8   9.5   10.9   

Exchange Rate Variation (16) (%)

  31.2      32.6      14.3      8.2      4.7   

CER (17)

  24.3      10.5      10.6      9.5      11.0   

 

The ratios disclosed above are considered significant by the management of Grupo Financiero Galicia despite of the fact that they are not a specific requirement of any GAAP.

 

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(1) The exchange rate used to convert the December 31, 2014, amounts into Dollars was Ps.8,5520 per US$1.00. All amounts are stated in millions of Pesos, except inflation and exchange rates, percentages, ratios, multiples and per-share data.
(2) Net financial income primarily represents income from interest on loans and other receivables resulting from financial brokerage plus net income from government and corporate debt securities, including gains and losses, minus interest on deposits and other liabilities from financial intermediation. It also includes the CER adjustment.
(3) Primarily includes debt with merchants and liabilities with other banks and international entities.
(4) The average balances of assets, including the related interest that is due are calculated on a daily basis for Banco Galicia and for Galicia Uruguay, as well as for Tarjetas Regionales consolidated with its operating subsidiaries, and on a monthly basis for Grupo Financiero Galicia and its non-banking subsidiaries.
(5) Net interest earned divided by interest-earning assets. For a description of net interest earned, see Item 4. “Information on the Company-Selected Statistical Information-Interest-Earning Assets-Net Yield on Interest-Earning Assets”.
(6) Financial margin represents net financial income divided by average interest-earning assets.
(7) Net income excluding minority interest as a percentage of average total assets.
(8) Net income as a percentage of average shareholders’ equity.
(9) Operating income is defined as net financial income plus net income from services.
(10) Administrative expenses as a percentage of operating income as defined above.
(11) Past-due loans are defined as the aggregate principal amount of a loan plus any accrued interest that is due and payable for which either the principal or any interest payment is 91 days or more past due.
(12) Non-Accrual loans are defined as those loans in the categories of: (a) Consumer portfolio: “Medium Risk”, “High Risk”, “Uncollectible”, and “Uncollectible Due to Technical Reasons”, and (b) Commercial portfolio: “With problems”, “High Risk of Insolvency”, “Uncollectible”, and “Uncollectible Due to Technical Reasons”.
(13) Charge-offs plus direct charge-offs minus bad debts recovered.
(14) As measured by the annual change in the end-of-period Wholesale Price Index (“WPI”), published by INDEC (as defined herein).
(15) As measured by the annual change in the end-of-period Consumer Price Index (“CPI”), published by INDEC.
(16) Annual change in the end-of-period exchange rate expressed in Pesos per Dollar.
(17) The “CER” is the “Coeficiente de Estabilización de Referencia”, an adjustment coefficient based on changes in the CPI.

Exchange Rate Information

The following table sets forth the annual high, low, average and period-end exchange rates for Dollars for the periods indicated, expressed in Pesos per Dollar and not adjusted for inflation.

 

     Exchange Rate (1)  
     High      Low      Average     Period-End  
     (in Pesos per Dollar)  

2010

     3.9857         3.7942         3.9226 (2)      3.9758   

2011

     4.3035         3.9715         4.1442        4.3032   

2012

     4.9173         4.3048         4.5760        4.9173   

2013

     6.5180         4.9228         5.5442        6.5180   

2014

     8.5555         6.5430         8.2314        8.5520   

October 2014

     8.5027         8.4475         8.4803        8.5023   

November 2014

     8.5260         8.5065         8.5140        8.5255   

December 2014

     8.5555         8.5263         8.5495        8.5520   

January 2015

     8.6395         8.5537         8.6024        8.6395   

February 2015

     8.7260         8.6488         8.6859        8.7243   

March 2015

     8.8197         8.7310         8.7790        8.8197   

 

(1) Using closing reference exchange rates as published by the Argentine Central Bank.
(2) Annual average: based on the last day of each month’s closing quotation.
(3) Monthly average: daily closing quotations.

As of April 27, 2015, the exchange rate was Ps.8.8935 for US$1.00.

 

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Item 3.B. Capitalization and Indebtedness

Not applicable.

 

Item 3.C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

Item 3.D. Risk Factors

You should carefully consider the risks described below in addition to the other information contained in this annual report. In addition, most, if not all, of the risks described below must be evaluated bearing in mind that our most important asset is our equity interest in Banco Galicia, thus, a material change in Banco Galicia’s shareholders’ equity or income statement would also adversely affect our businesses and results of operations. We may also face risks and uncertainties that are not presently known to us or that we currently deem immaterial, which may impair our business. Our operations, property and customers are located in Argentina. Accordingly, the quality of our customer portfolio, loan portfolio, financial condition and results of operations depend, to a significant extent, on the macroeconomic and political conditions prevailing in Argentina. In general, the risk assumed when investing in the securities of issuers from countries such as Argentina, is higher than when investing in the securities of issuers from developed countries.

Risk Factors Relating to Argentina

Market conditions and the government’s intervention in the economy may adversely affect our business and prospects.

Grupo Galicia’s results of operations may be affected by inflation, fluctuations in the exchange rate, modifications in interest rates, changes in the government’s policies, and other political or economic developments either internationally or in Argentina or other events that affect the country.

Historically, Argentina’s economy has experienced periods of high levels of instability and volatility, low or negative economic growth and high and fluctuating levels of inflation and devaluation. There are a number of factors that could have a material and adverse effect on Argentina’s economy, in general, and, in particular, on Grupo Galicia’s results of operations, the rights of the holders of securities issued by Grupo Galicia and the value of such securities. These factors include, but are not limited to, Argentina’s inability to sustain economic growth, the effects of inflation, Argentina’s limited ability to obtain external financing, a decline in the international prices for Argentina’s main commodity exports, fluctuations in the exchange rate of other countries against which Argentina competes, regulatory actions taken by the Government (including, for example, the nationalization of YPF, certain changes in the legal framework applicable to the capital markets, and restrictions regarding the foreign exchange market), actions taken by the Government regarding the enforcement of the ongoing lawsuit with the holdout creditors from Argentina’s debt default and the vulnerability of the Argentine economy to external shocks.

After the presidential elections in October 2011, and in light of the foreign exchange imbalance that arose as a result of the increase in the dollarization of the private sector portfolio and the decrease in the balance of payment current account surplus, the Government issued a series of regulations with a view to stabilizing Argentina’s stock of international reserves. The main measures taken included: (i) suspension of regulations that allowed non-financial Argentine residents (both individuals and entities) to purchase foreign currency for the following concepts: real estate investments abroad, loans granted to non-residents, direct investment contributions abroad, portfolio investments abroad, other investments abroad by residents, among other saving transactions, (ii) new obligations regarding the repatriation of funds (applicable, for example, to insurance and mining companies), (iii) shorter periods within which to convert foreign currency into Pesos when there is an obligation to repatriate funds, (iv) the implementation of a reporting system which includes a pre-import of Goods Affidavit (“DJAI”), an Anticipated Affidavit of Services ( “DJAS”) and an Anticipated Affidavit of (Financial) Payments Abroad (“DAPE” – Please see below” Risk Factors Relating to Us”) whereby, for example, importers of goods for consumption are required to file such declarations with the Federal Public Revenue Authority prior to issuing any purchase order (or

 

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similar document), otherwise, they cannot make any import-related payment or fulfill the necessary customs procedures to obtain the clearance of the imported goods, (v) the imposition of a 35% tax on credit card purchases made abroad and (vi) the reduction of the limit imposed on financial entities with respect to their net positive position in foreign currency. In 2014, certain restrictions on access to the foreign exchange market for savings were partially lifted for individuals able to demonstrate the origin of their revenues.

During 2014, the economic activity showed signs of contraction mainly due to a significant reduction in sales by the automotive sector, among others. Although the government implemented several actions in other to counteract the weakening of the economy, the financial metrics for 2014 demonstrated a weakening as compared to 2013.

Factors such as those described above as well as general governmental regulatory intervention and the deterioration in certain variables in the international context could lead to a slowdown in the Argentine economic growth rate and a high inflation rate. Further, no assurance can be given that additional events in the future, such as the enactment of new regulations by the Argentine government or authorities will not occur. In addition, in October presidential elections will take place in Argentina, and its outcome is still uncertain. As a result of all the foregoing, the financial position and results of operations of private sector companies in Argentina, including Grupo Galicia, the rights of holders of securities issued by such institutions and the value of such securities may be negatively and adversely impacted.

The performance of the Argentine economy may deteriorate due to current economic conditions and any significant decline may adversely impact Grupo Galicia’s financial condition.

According to the Argentine Institute of Statistics and Census (“INDEC”), Argentina’s Gross Domestic Product (“GDP”), in real terms, grew by 3.1% in 2008, 0.1% in 2009, 9.5% in 2010, 8.4% in 2011, 0.8% in 2012, 2.9% in 2013 and 0.5% in 2014. Thus, after the recovery observed in 2010 and 2011, in 2012 the economy suffered a slowdown as a result of the negative impact of lower crop yields, Brazil’s economic slowdown, and the deterioration in the investment climate due to heightened regulations and the domestic economy’s loss of competitiveness resulting from a level of inflation that exceeded the exchange depreciation rate. The reversal of some of these factors, primarily the improvement recorded in the agricultural sector and the recovery of the automotive sector as a result of a higher demand from Brazil, contributed to the acceleration of the Argentine economy in 2013. During 2014, however, the level of economic activity decreased and the GDP only grew at an annual rate of 0.5%. International factors, such as the strengthening of U.S. currency which impacted commodity price dynamics (particularly worthmentioning for the Argentine economy are those of soy and oil) and the stagnation of the Brazilian economy, contributed to the lower GDP growth rate. In addition to these events, the macroeconomic imbalances as well as the regulatory risks continue, creating risks as to the domestic economy’s performance.

A less favorable international economic environment, a lack of stability and competitiveness of the Peso against other foreign currencies, the low level of confidence among consumers and foreign and domestic investors, a higher inflation rate and future political uncertainties, among other factors, may affect the development of the Argentine economy and cause volatility in the local capital markets.

In addition, the Argentine economy may be subject to further deterioration as a result of the following economic conditions:

 

    a limited availability of long-term credit;

 

    difficulty in reducing the high spending growth rate;

 

    high inflation rates;

 

    the shortage of foreign currency, which limits economic growth and which could lead to additional restrictions on the foreign exchange market;

 

    the ongoing review of the regulatory framework applicable to many private sector activities which remains uncertain; and

 

    the dependency of economic recovery on high commodity prices, which are volatile and beyond the control of the Argentine government.

 

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A continued slowdown in Argentina’s economic growth or an increased level economic instability may have a significant adverse effect on Grupo Galicia’s business, financial position and results of its operations and the trading price for its ADSs.

If the high levels of inflation continue, the Argentine economy and Grupo Galicia’s financial position and business could be adversely affected.

The high rate of economic growth in recent years, which has been fueled by Argentina’s full utilization of its installed productive capacity, along with expansive fiscal and monetary policies, has caused a high level of inflation in Argentina since 2007. According to INDEC data, the CPI grew 10.9% in 2010, 9.5% in 2011, 10.8% in 2012, 10.9% in 2013 and 23.9% in 2014. The WPI increased 14.6% in 2010, 12.7% in 2011, 13.1% in 2012, 14.8% in 2013 and 28.3% in 2014. In the past, inflation has materially undermined the Argentine economy and the government’s ability to generate conditions that fostered economic growth. In addition, high inflation or a high level of volatility with respect to the same may materially and adversely affect the business volume of the financial system and prevent the growth of intermediation activity levels. This result, in turn, could adversely affect the level of economic activity and employment.

A high inflation rate also affects Argentina’s competitiveness abroad, real salaries, employment, consumption and interest rates. A high level of uncertainty with regard to these economic variables, and a general lack of stability in terms of inflation, could lead to shortened contractual terms and affect the ability to plan and make decisions. This may have a negative impact on economic activity and on the income of consumers and their purchasing power, all of which could materially and adversely affect Grupo Galicia’s financial position, results of operations and business.

In addition to the above, the accuracy of the measurements of the INDEC is in doubt, and the current actual consumer and wholesale price indices may be significantly higher than those indicated by INDEC. If a correction of the CPI and other INDEC indices is deemed necessary, this may lead to a marked loss of confidence in the Argentine economy. A new index with nationwide coverage (the Índice de Precios al Consumidor Nacional urbano or IPCNu), the methodology of which was developed with help from the IMF, was introduced in January 2014 to replace the previous CPI index used by the INDEC that only covered the Autonomous City of Buenos Aires (“Buenos Aires”) and its outskirts. Although IPCNu’s initial figures were close to figures calculated by private consultants, during 2014 the IPCNu measurements gradually began to differ from those of private consultants and, as a result of such differentiation, the accuracy of the measurements of the IPCNu is also in dobut.

Argentina’s ability to obtain financing and to attract direct foreign investment is limited and may adversely affect Grupo Galicia’s financial position, results of operations and business.

As of the date hereof, Argentina has very limited access to foreign financing, primarily as a result of a default in December 2001 on its debt to foreign bondholders, multilateral financial institutions and other financial institutions. Although Argentina settled all of its outstanding debt with the IMF in 2006, carried out a variety of debt swaps with certain bondholders between 2004 and 2010, and reached an agreement with the Paris Club in 2014, the Government is still in default with some of its foreign creditors.

In this regard, among other issues, Argentina is currently involved in litigation in U.S. courts with the holdout bondholders, i.e. those bondholders that chose not to participate in the above mentioned debt swaps. Although the Government timely made payment on its 2005 and 2010 restructured bonds, some of the holders of such bonds did not receive their payments due to injuntions imposed by the relevant New York court. As a consequence, the Government was declared in technical default on its 2005 and 2010 restructed bonds in July 2014. The outcome of this litigation and the technical default is still uncertain. In addition, the foreign shareholders of several Argentine companies, mostly public utilities, have filed claims with the International Centre for Settlement of Investment Disputes (“ICSID”), alleging that the emergency measures adopted by the Argentine government differ from the fair and equitable treatment provisions set forth in several bilateral investment treaties to which Argentina is a party. Both items would entail a contingent debt that would exceed US$20 billion. In 2014, the Govenrment fully paid Repsol´s claim stemming from the Government’s nationalization of the oil company YPF, in 2012, and also reached an agreement with other five foreign companies that had pending claims in the ICSID.

 

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Argentina’s default on its foreign debt and the abovementioned claims that have been filed against Argentina may prevent the Argentine government and Argentine private sector companies from accessing the international capital markets and receiving direct foreign investment. Due to the same, the Argentine government may not be able to foster economic growth. Moreover, direct foreign investment in the private sector, which is also necessary to foster economic growth, may not occur at the necessary or optimal levels. These risks may be additionally exacerbated due to the limited liquidity available for investment in the local capital markets, as well as the highly concentrated pool of potential local investors.

If Argentina does not fully recover its ability to access the international capital markets and attract direct foreign investment, there is a risk that the country will not obtain the requisite capital to restart the investment cycle and achieve a high economic growth rate. If this occurs, Argentina’s fiscal condition may be adversely affected, which could generate more inflation and undermine the Argentine government’s ability to implement economic policies designed to foster growth. The difficulty of sustaining economic growth in the long term, along with a reasonable stability in prices, may result in another episode of economic instability, which could have a material adverse effect on the prospects of the Argentine economy and, therefore, could have a material adverse effect on Grupo Galicia’s financial condition and operating results and on the trading prices for its ADSs.

A decline in the international prices of Argentina’s main commodity exports and an additional real appreciation of the Peso against the U.S. Dollar could affect the Argentine economy and create new pressures on the foreign exchange market, and have a material adverse effect on Grupo Galicia’s financial condition, prospects and operating results.

Argentina’s economic recovery since the 2001-2002 crisis has taken place within a context of increasing prices for commodity exports, such as soy, which represented 28% of Argentine exports in 2014. High prices for commodities have contributed to the increase in exports by Argentina since the third quarter of 2002, and have contributed to increased tax revenues for the Argentine government, mainly from export taxes (withholdings). However, this reliance on the export of certain commodities, such as soy, has made the Argentine more vulnerable to fluctuations in their prices.

A significant increase in the real appreciation of the Peso could affect Argentina’s competitiveness, substantially affecting exports, and this, in turn could prompt new recessionary pressures on the country’s economy and a new imbalance in the foreign exchange market, which could lead to a high degree of volatility in the exchange rate. Most importantly, in the short term, a significant appreciation of the real exchange rate could substantially reduce the Argentine public sector’s tax revenues in real terms, given the strong reliance on taxes on exports (withholdings). The occurrence of the foregoing could lead to higher inflation and potentially materially and adversely affect the Argentine economy, as well as Grupo Galicia’s financial condition and operating results and, thus, the trading prices for its ADSs.

Volatility in the regulatory framework could have a material adverse effect on Argentina’s economy in general, and on Grupo Galicia’s financial position, specifically.

In response to the 2001-2002 economic crisis, the Argentine government enacted several laws amending the regulatory framework governing a number of different activities. The Argentine government continues to exert significant control over the economy. For example, since fiscal year 2012, the Argentine Central Bank passed a number of regulations that require financial entities, including Banco Galicia, to provide loans with interest rates that are below the then prevailing market interest rates and, during the fiscal year 2014, the Argentine Central Bank passed new regulations limiting the interest rates and fees that can be charged by finantial entities for certain types of loans to individuals. In addition, political and social pressures could inhibit the Argentine government’s implementation of policies designed to maintain price stability, generate growth and enhance consumer and investor confidence.

Existing or new regulations that could potentially be enacted in the future by Argentine authorities could materially and adversely affect the assets, revenues and operating income of private sector companies, including Grupo Galicia, the rights of holders of securities issued by those entities, or the value of those securities.

 

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The lack of regulatory foresight could impose significant limitations on the activities of the financial system and Grupo Galicia’s business, and would generate uncertainty regarding its future financial position and results of operations and the trading price for its ADSs.

The Argentine economy and its goods, financial services and securities markets remain vulnerable to external factors, which could affect Argentina’s economic growth and Grupo Galicia’s prospects.

The financial and securities markets in Argentina are influenced, to varying degrees, by economic and market conditions in other countries. Although such conditions may vary from country to country, investor reactions to events occurring in one country may affect capital flows to issuers in other countries, and consequently, affect the trading prices of their securities. Decreased capital inflows and lower prices in the securities market of a country may have a material adverse effect on the real economy of those countries in the form of higher interest rates and foreign exchange volatility.

During periods of uncertainty in international markets, investors generally choose to invest in high-quality assets (“flight to quality”) over emerging market assets. This has caused and could continue to cause an adverse impact on the Argentine economy and has and could continue to adversely affect the country’s economy in the near future.

During 2011 and 2012, Greece and, to a lesser extent, other European countries such as Portugal, Ireland, Spain and Italy, continued facing significant problems, and the risk of these issues continuing into the future continues to be a concern. The problems faced by the European Union’s periphery countries, resulting from a combination of factors such as low growth, fiscal woes and financial pressures, are particularly acute. Reestablishing financial and fiscal stability to offset the low or zero growth continues to pose a challenge. As a result, the leading economies of the European Union imposed emergency economic plans in such countries which plans are still in place. During 2014, the U.S. Federal Reserve reduced its asset purchase and its monetary easing programs. Therefore, such changes started to strengthen the U.S. Dollar globally, affecting commodity prices evolution and lowering capital inflows to emerging markets.

A new global economic and/or financial crisis or the effects of deterioration in the current international context, could affect the Argentine economy and, consequently, Grupo Galicia’s results of operations, financial condition and the trading price for its ADSs.

The exchange rate used for financial reporting may not reflect Grupo Galicia’s economic reality.

It has been noted that an official exchange rate exists in Argentina that is lower than a blue-chip or market exchange rate. The official exchange rate between Pesos and Dollars, which is published by the Argentine Central Bank, was used for converting the amounts reflected in the financial statements of Grupo Galicia contained herein. As this official exchange rate is lower than the blue-chip or market exchange rate that exists in Argentina, the amounts contained in this annual report may not accurately reflect Grupo Galicia’s economic reality, which could affect Grupo Galicia’s purchasing power in Dollars and its capacity to meet its obligations denominated in Dollars which, in turn, could have a material adverse effect on the trading prices for Grupo Galicia’s ADSs.

A potential future devaluation of the Peso may hinder or potentially prevent Grupo Galicia from being able to honor its foreign-currency denominated obligations.

If the Peso were to devalue significantly in the future, it could have an adverse effect on the ability of Argentine companies to make timely payments on their debts denominated in or indexed or otherwise connected to a foreign currency, generate very high inflation rates, reduce real salaries significantly, and have an adverse effect on companies focused on the domestic market, such as public utilities and the financial industry. Devaluation could also adversely affect the Argentine government’s capacity to honor its foreign debt, with adverse consequences for Grupo Galicia’s and Banco Galicia’s businesses, which could affect Grupo Galicia’s capacity to meet future obligations denominated in a foreign currency which, in turn, could have a material adverse effect on the trading prices for Grupo Galicia’s ADSs.

During 2014 the exchange rate of the Argentine peso had an erratic path. On January the official exchange rate suffered a devaluation of approximately 23% against the U.S. dollar, and since then the ARS/USD parity observed a more stable path, reaching a devaluation of approximately 30.7% during the fiscal year. As a consequence, the exchange rate as of the date of this report may not be indicative of current or future exchange rates.

 

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The Argentine foreign exchange market is subject to controls, which may adversely affect the ability and the manner in which Grupo Galicia repays its obligations denominated in, indexed or to otherwise connected to a foreign currency.

Decree No. 1570/01, effective as of December 3, 2001, established certain restrictions on the transfer of foreign currencies out of Argentina, prohibiting most ordinary foreign currency transfers abroad. Decree No. 1606/01 maintained the same restrictions, but has incorporated additional restrictions regarding the transfers of funds that entered Argentina after December 3, 2001 to foreign countries.

Subsequently, the Argentine government issued Decree No. 616/05 (and supplementary regulations), which regulated Argentina’s capital inflows and outflows. Basically, this decree establishes that, subject to certain exceptions, funds transferred into Argentina by residents and non-residents are subject to a deposit, called an “encaje”, equal to 30% of the amount transferred, which must be deposited in U.S. Dollars for one year in a local financial institution, during which time such amount will not bear interest. This deposit cannot be transferred and cannot be used as security. This regulation also establishes that Argentine companies must obtain the approval of the Argentine Central Bank (BCRA, as per its initials in Spanish) in order to transfer funds from Argentina to accounts abroad, subject to certain exceptions, and also sets forth the prerequisites for individuals to acquire and transfer funds in the foreign exchange market without requiring that prior authorization.

Since late 2011, the controls and regulations in respect of the foreign exchange market have become more stringent, limiting the possibility of transferring funds abroad. For further details on these and other exchange control measures in respect of the foreign exchange market, please see the section titled Item 8. “Financial Information-Legal Proceedings”.

No assurance can be provided that the abovementioned regulations will not be amended, or that no new regulations will be enacted in the future imposing greater limitations on funds flowing into and out of the Argentine foreign exchange market. Any such measures, as well as any additional controls and/or restrictions, could materially affect Grupo Galicia’s ability to access the international capital markets and may undermine its ability to make payments of principal and/or interest on its obligations denominated in a foreign currency or transfer funds abroad (in total or in part) to make payments on its obligations (which could affect Grupo Galicia’s financial condition and results of operations). Therefore, Argentine resident or non-resident investors should take special notice of these regulations (and their amendments) that limit access to the foreign exchange market. Grupo Galicia may be prevented from making payments in U.S. Dollars and/or making payments outside Argentina due to the restrictions in place at that time in the foreign exchange market and/or due to the restrictions on the ability of companies to transfer funds abroad.

It may be difficult to effect service of process against Grupo Galicia’s executive officers and directors, and foreign judgments may be difficult to enforce or may be unenforceable.

Service of process upon individuals or entities which are not resident in the United States may be difficult to obtain in the United States. Grupo Galicia and substantially all of its subsidiaries are companies incorporated under the laws of Argentina. Most of their shareholders, directors, members of the Supervisory Syndics’ Committee, officers, and some specialists named herein are domiciled in Argentina and the most significant part of their assets is located in Argentina. Although Grupo Galicia has an agent to receive service of process in any action against it in the United States with respect to its ADSs, none of its executive officers or directors has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult to effect service of process against Grupo Galicia’s executive officers and directors. Additionally, under Argentine law, the enforcement of foreign judgments will only be allowed if the requirements in sections 517 to 519 of the National Code of Civil and Commercial Procedures are met or, if it is one of the powers governed by provincial law, the requirements in the applicable local code of procedure, and provided that the foreign judgment does not infringe on concepts of public policy in Argentine law, as determined by the competent courts of Argentina. An Argentine court may consider the enforcement of foreign judgments which order payments to be made pursuant to a foreign-currency denominated security, to holders outside Argentina is contrary to the public policy of Argentina if for instance at such time there are legal restrictions in place prohibiting Argentine debtors from transferring foreign currency abroad to pay off debts.

 

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The measures adopted by the Argentine government and the claims filed by workers on an individual basis or as part of a labor union action may lead to pressures to increase salaries or additional benefits, which would increase companies’, including Grupo Galicia’s, operating costs.

In the past, the Argentine government has passed laws and regulations requiring private sector companies to maintain certain salary levels and provide their employees with additional benefits. Furthermore, employers, both in the public sector and in the private sector, have been experiencing intense pressures from their personnel, or from the labor unions representing them, demanding salary increases and certain benefits for the workers, given the high inflation rates.

Grupo Galicia cannot assure you that the Argentine government will not adopt measures in the future mandating salary increases or the provision of additional employee benefits or that the employees or their unions will not exert pressure in demanding those measures. Any such measures could have a material and adverse effect on Grupo Galicia’s expenses and business, results of operations and financial condition and, thus, on the trading prices for its ADSs.

Risk Factors Relating to the Argentine Financial System

The stability of the Argentine financial system is dependent upon the ability of financial institutions, including Banco Galicia, the main subsidiary of Grupo Galicia, to maintain and increase the confidence of depositors.

The measures implemented by the Argentine government in late 2001 and early 2002, in particular the restrictions imposed on depositors to withdraw money freely from banks and the pesification and restructuring of their deposits, were strongly opposed by depositors due to the losses on their savings and undermined their confidence in the Argentine financial system and in all financial institutions operating in Argentina.

If depositors once again withdraw their money from banks in the future, there may be a substantial negative impact on the manner in which financial institutions, including Banco Galicia, conduct their business, and on their ability to operate as financial intermediaries. Loss of confidence in the international financial markets may also adversely affect the confidence of Argentine depositors in local banks.

In the future, an adverse economic situation, even if it is not related to the financial system, could trigger a massive withdrawal of capital from local banks by depositors, as an alternative to protect their assets from potential crises. Any massive withdrawal of deposits could cause liquidity issues in the financial sector and, consequently, a contraction in credit supply.

The occurrence of any of the above could have a material and adverse effect on Grupo Galicia’s expenses and business, results of operations and financial condition and, thus, on the trading prices for its ADSs.

If financial intermediation activity volumes relative to GDP are not restored to significant levels, the capacity of financial institutions, including Banco Galicia, the main subsidiary of Grupo Galicia, to generate profits may be negatively affected.

As a result of the 2001-2002 economic crisis, the volume of financial intermediation activity dropped dramatically: private sector credit plummeted from 24% of GDP in December 2000 to 7.7% in June 2004 and total deposits as a percentage of GDP fell from 31% to 23.2% during the same period. The depth of the crisis and the effect it had on depositors’ confidence in the financial system created uncertainty as to its ability to act as an intermediary between savings and credit. Further, the ratio of total financial system’s private-sector deposits and loans to GDP is low when compared to international levels and lower than the periods prior to the crisis, with loans to the private sector representing approximately 15% of GDP as of December 31, 2014.

There is no assurance that financial intermediation activities will continue in a manner sufficient to reach the necessary volumes to provide financial institutions, including Banco Galicia, with sufficient capacity to generate income, or that that those actions will be sufficient to prevent Argentine financial institutions, such as Banco

 

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Galicia, from having to assume excessive risks in terms of maturity mismatches. Under these circumstances, for an undetermined period of time, the scale of operations of Argentine-based financial institutions, including Banco Galicia, their business volume, the size of their assets and liabilities or their income-generation capacity could be much lower than before the crisis which may, in turn, impact the results of operations of Banco Galicia and, potentially, the trading price for Grupo Galicia’s ADSs.

The Argentine financial system’s growth and income, including that of Banco Galicia, the main subsidiary of Grupo Galicia, depend in part on the development of medium- and long-term funding sources.

In spite of the fact that the financial system’s and Banco Galicia’s deposits continue to grow, they are mostly demand or short-term time deposits and the sources of medium- and long-term funding for financial institutions are currently limited. If Argentine financial institutions, such as Banco Galicia, are unable to access adequate sources of medium and long-term funding or if they are required to pay high costs in order to obtain the same and/or if they cannot generate profits and/or maintain their current volume and/or scale of their business, this may adversely affect Grupo Galicia’s ability to honor its debts.

Argentine financial institutions (including Banco Galicia) continue to have exposure to public sector debt (including securities issued by the Argentine Central Bank) and its repayment capacity, which in periods of economic recession, may negatively affect their results of operations.

Argentine financial institutions continue to be exposed, to some extent, to public sector debt and its repayment capacity. The Argentine government’s ability to honor its financial obligations is dependent on, among other things, its ability to establish economic policies that succeed in fostering sustainable growth and development in the long term, generating tax revenues and controlling public expenditures, which could, either partially or totally, fail to take place.

Banco Galicia’s exposure to the public sector as of December 31, 2014 was Ps.10,968 million, representing approximately 10.4% of its total consolidated assets and 1.1 times its shareholders’ equity. Of this total, Ps.3,405 million corresponded to Argentine government securities, while the remaining Ps.7,563 million were Argentine Central Bank debt instruments. As a result, Banco Galicia’s income-generating capacity may be materially impacted, or may be particularly affected by the Argentine public sector’s repayment capacity and the performance of public sector bonds, which, in turn, is dependent on the factors referred to above. Banco Galicia’s ability to honor its financial obligations may be adversely affected by the Argentine government’s repayment capacity or its failure to meet its obligations in regard to Argentine government obligations owed to Banco Galicia.

In the future, the Argentine government may impose new limitations on creditors’ rights in Argentina and on the possibility of enforcing certain guarantees, which could adversely affect the financial conditions of financial institutions, including Banco Galicia, the main subsidiary of Grupo Galicia.

To protect debtors affected by the 2001-2002 economic crisis, beginning in 2002, the Argentine government passed various laws and regulations that temporarily suspended the ability of creditors to enforce their guarantees and exert their rights under similar instruments established in financing agreements in the event of a default by the debtor. Such limitations have, in some cases, restricted Argentine creditors, such as Banco Galicia, from initiating actions and/or lawsuits to collect and recover on defaulted loans. While these rules have ceased to be applicable, in the event of an adverse economic environment or in other circumstances, the Government could pass new rules and regulations restricting the ability of creditors to enforce their rights pursuant to loan agreements, guarantees and similar instruments or documents, the impact of which may have an adverse effect on the business of financial institutions in Argentina, including those of Banco Galicia.

The Consumer Protection Law may limit some of the rights afforded to Grupo Galicia and its subsidiaries.

Argentine Law No. 24,240 (the “Consumer Protection Law”) sets forth a series of rules and principles designed to protect consumers, which include Banco Galicia’s customers. The Consumer Protection Law was amended by Law No. 26,361 on March 12, 2008 to expand its applicability and the penalties associated with violations thereof. Additionally, Law No. 25,065 (as amended by Law No. 26,010 and Law No. 26,361, the “Credit Card Law”) also sets forth public policy regulations designed to protect credit card holders.

 

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The application of both the Consumer Protection Law and the Credit Card Law by administrative authorities and courts at the federal, provincial and municipal levels has increased. This trend has increased general consumer protection levels. In the event that Grupo Galicia and its subsidiaries are found to be liable for violations of any of the provisions of the Consumer Protection Law or the Credit Card Law, the potential penalties could limit some of Grupo Galicia and its subsidiaries’ rights, for example, with respect to their ability to collect payments due from services and financing provided by Grupo Galicia or its subsidiaries, and adversely affect their financial results of operations. Grupo Galicia cannot assure you that court and administrative rulings based on the newly-enacted regulation or measures adopted by the enforcement authorities will not increase the degree of protection given to its debtors and other customers in the future, or that they will not favor the claims brought by consumer groups or associations. This may prevent or hinder the collection of payments resulting from services rendered and financing granted by Grupo Galicia’s subsidiaries, which may have an adverse effect on their results and operations.

Class actions against financial institutions for an indeterminate amount may adversely affect the profitability of the financial system and of Banco Galicia, specifically.

Certain public and private organizations have initiated class actions against financial institutions in Argentina. Class actions are contemplated in the Argentine National Constitution and the Consumer Protection Law, however, their guidance with respect to procedural rules for instituting and trying class action cases is limited. Notwithstanding the foregoing, the courts have admitted class actions providing for some guidance with respect to the procedures for trying the same. These courts have admitted several complaints filed against financial institutions to defend collective interests, based on arguments that object to the charges applied to certain products, the interest rates applied and the advisory services rendered in the sale of government securities, among others.

Final judgments entered against financial institutions under these class actions may affect the profitability of financial institutions in general and of Banco Galicia specifically in relation to class actions filed against Banco Galicia. If these class actions plaintiffs were to prevail, their success could have an adverse effect on the financial or insurance industry and, consequently, on Grupo Galicia’s business and financial condition. For further information regarding class actions brought against Banco Galicia, please refer to Item 8. “Financial Information–Legal Proceedings”.

Administrative procedures filed by the tax authorities of certain Argentine provinces against financial institutions, such as Banco Galicia (the primary subsidiary of Grupo Galicia) and amendments to tax laws applicable to Grupo Galicia could generate losses for Grupo Galicia.

Buenos Aires tax authorities, as well as certain provincial tax authorities, have initiated administrative proceedings against financial institutions in order to collect higher gross income taxes from such financial institutions from the year ended 2002 and onwards. The Argentine Federal Court of Appeals granted Banco Galicia a preliminary injunction in an amount corresponding to the Compensatory Bond (as defined below) in Banco Galicia’s challenge of an assessment by the Buenos Aires tax authorities. The Argentine Supreme Court of Justice affirmed the opinion of the Argentine Federal Court of Appeals, and the Court of Appeals therefore ordered the fiscal authority to refrain from starting tax enforcement proceedings or otherwise requesting precautionary measures for such purpose. The aim of the Compensatory Bond was to compensate financial institutions for losses that they would have otherwise incurred as a result of the measures implemented to confront the 2001-2002 economic crisis, in particular, the asymmetric pesification. The final decision regarding these proceedings remains uncertain and financial institutions, including Banco Galicia, may suffer substantial losses.

In addition, although Banco Galicia considers it has met its tax obligations regarding current regulations and has properly recorded provisions for those risks based on the opinions and advice of its external legal advisors and pursuant to the applicable accounting standards, certain risk factors may render those provisions inadequate. Tax authorities may not agree with Grupo Galicia’s tax treatment, possibly leading to an increase in the tax responsibilities.

Moreover, amendments to existing regulations may increase Grupo Galicia’s tax rate and a material increase in the tax burden could adversely affect its financial results.

 

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Risk Factors Relating to Us

Grupo Galicia may be unable to repay its financial obligations due to a lack of liquidity it may suffer because of being a holding company

Grupo Galicia, as a holding company, conducts its operations through its subsidiaries. Consequently, it does not operate or hold substantial assets, except for equity investments in its subsidiaries. Except for such assets, Grupo Galicia’s ability to invest in its business developments and/or to repay obligations is subject to the funds generated by its subsidiaries and their ability to pay cash dividends. In the absence of such funds, Grupo Galicia may be forced to resort to financing options at unappealing prices, rates and conditions. Additionally, such financing could be unavailable when Grupo Galicia may need it.

Grupo Galicia’s subsidiaries are under no obligation to pay any amount to enable Grupo Galicia to carry out investment activities and/or to cancel its liabilities, or to give Grupo Galicia funds for such purposes. Each of the subsidiaries is a legal entity separate from Grupo Galicia, and due to certain circumstances, legal or contractual restrictions, as well as to the subsidiaries’ financial condition and operating requirements, Grupo Galicia’s ability to receive dividends and its ability to develop its business and/or to comply with payment obligations, could be limited. Under certain regulations and agreements, Banco Galicia has restrictions related to dividend distribution. In particular, effective as of the end of 2011, the Argentine Central Bank implemented new regulations regarding dividend distribution. These new regulations established that after paying dividends, financial institutions must still have an excess of computable capital over the new minimum requirement of 75%, an increase from the previous requirement of 30%. As a result of these regulations, Banco Galicia was unable to declare dividends for the fiscal year ended December 31, 2014, and therefore the ability of Grupo Financiero Galicia to pay dividends has been negatively impacted. In addition, the Federal Public Revenue Authority enacted new regulation (effective since February, 2013), requiring an Anticipated Affidavit of (Financial) Payments Abroad (named “DAPE”) in order to complete payments of dividends to non-residents (among other concepts which are also subject to the mandatory DAPE).

Notwithstanding the fact that the repayment of such obligations could be afforded by Grupo Galicia through other means, such as bank loans or new issues in the capital market, investors should take notice of the above prior to deciding on their investment in debt or equity of Grupo Galicia. For further information on dividend distribution restrictions, see Item 5.B. “Liquidity and capital Resources.”

Corporate governance standards and disclosure policies that govern companies listing their shares as part of the public offerings system in Argentina may differ from those regulating highly-developed capital markets, such as the U.S. As a foreign private issuer, Grupo Galicia applies disclosure policies and requirements that differ from those governing U.S. domestic registrants.

Argentine disclosure requirements, are more limited than those in the United States in important respects and, as a foreign private issuer, Grupo Galicia may be subject to different disclosure and other requirements than a domestic U.S. registrant. For example, as a foreign private issuer in the U.S., Grupo Galicia is not subject to the same requirements and disclosure policies as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue financial statements, report on significant events and the standards applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants.

In addition, although Argentine laws provide for certain requirements that are similar to those prevailing in the U.S. in relation to publicly listed companies (including, for example, those related to price manipulation), in general, applicable Argentine laws are different to those in the U.S. and in certain aspects may provide different or fewer protections or remedies as compared to U.S. laws. Further, Grupo Galicia relies on exemptions from certain Nasdaq rules that are applicable to domestic companies. Accordingly, the information available about Grupo Galicia to you is not the same as, and may be more limited than, the information available to shareholders of a U.S. company.

 

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Adverse conditions in the credit, capital and foreign exchange markets may have a material adverse effect on Grupo Galicia’s financial position and results of operations and adversely impact it by limiting its ability to access funding sources.

Grupo Galicia may sustain losses relating to its investments in fixed- or variable-income securities on the exchange market and its monetary position due to, among other reasons, changes in market prices, defaults and fluctuations in interest rates and in exchange rates. A deterioration in the capital markets may cause Grupo Galicia to record net losses due to a decrease in the value of its investment portfolios, in addition to losses caused by the volatility in financial market prices, even if the economy overall is not affected. Any of these losses could have an adverse effect on Grupo Galicia’s results of operations.

A percentage of Banco Galicia’s liquidity is derived from local banks and the local capital market. As of December 31, 2014, Banco Galicia’s liquidity ratio was 38.6%, as measured by liquid assets as a percentage of total deposits (liquid assets that include cash, bank loans, holdings of securities issued by the Argentine Central Bank (“Lebac” and “Nobac”), net interbank loans, short-term placements with correspondent banks and repurchase agreement transactions in the local market). Any disruptions in the local capital market or in the local financial market, as have been experienced by Argentina in the past, may result in a reduction in availability and/or increased cost of financing for liquidity obtained from such sources. These conditions may impact Banco Galicia’s ability to replace, in a cost effective and/or timely manner, maturing liabilities and/or access funding to execute its growth strategy. Any such event may adversely affect Banco Galicia’s financial position and/or results of operations.

Grupo Galicia’s subsidiaries estimate and establish reserves for potential credit risk or future credit losses, which may be inadequate or insufficient, and which may, in turn, materially and adversely affect its financial position and results of operations.

Grupo Galicia’s subsidiaries estimate and establish reserves for potential credit risk and losses related to changes in the levels of income of debtors/borrowers, increased rates of inflation, increased levels of non-performing loans or an increase in interest rates. This process requires a complex and subjective analysis, including economic projections and assumptions regarding the ability of debtors to repay their loans.

Therefore, if in the future Grupo Galicia’s subsidiaries are unable to effectively control the level of quality of their loan portfolio, if loan loss reserves are inadequate to cover future losses, or if they are required to increase their loan loss reserves due to an increase in the amount of their non-performing loans, the financial position and the results of operations of Grupo Galicia’s subsidiaries may be materially and adversely affected.

If Grupo Galicia’s main subsidiary, Banco Galicia, should fail to detect money laundering and other illegal or inappropriate activities in a comprehensive or timely manner, the business interests and reputation of Banco Galicia, and consequently, that of Grupo Galicia, may be harmed.

Banco Galicia must be in compliance with all applicable laws against money laundering, funding of terrorist activities and other regulations. These laws and regulations require, among other things, that Banco Galicia adopt and implement control policies and procedures which involve “know your customer” principles that comply with the applicable regulations and reporting suspicious or unusual transactions to the applicable regulatory authorities. While Banco Galicia has adopted policies and procedures intended to detect and prevent the use of its network for money laundering activities and by terrorists, terrorist organizations and other types of organizations, those policies and procedures may fail to fully eliminate the risk that Banco Galicia has been or is currently being used by other parties, without its knowledge, to engage in activities related to money laundering or other illegal activities. To the extent that Banco Galicia has not detected or does not detect those illegal activities, the relevant governmental agencies to which it reports have the power and authority to impose fines and other penalties on Banco Galicia. In addition, its business and reputation could be adversely affected if customers use it for money laundering activities or other illegal activities.

A disruption or failure in Grupo Galicia’s information technology system could adversely affect its operations and financial position.

The success of Grupo Galicia’s subsidiaries is dependent upon the efficient and uninterrupted operation of their communications and computer hardware systems, including those systems related to the operation of their ATM networks. Grupo Galicia’s communications, systems or transactions could be harmed or disrupted by fire, floods, power failures, defective telecommunications, computer viruses, electronic or physical theft and similar events or disruptions. Any of the foregoing events may cause disruptions in Grupo Galicia’s systems, delays and the loss of critical data, and could prevent it from operating at optimal levels. In addition, the contingency plans in place

 

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may not be sufficient to cover all those events and, therefore, this may mean that the applicable insurance coverage is limited or inadequate, preventing Banco Galicia from receiving full compensation for the losses sustained as a result of such a disruption. If any of these events occur, it could damage the reputation, entail serious costs and affect Grupo Galicia’s transactions, as well as its results of operations and financial position.

 

Item 4. Information on the Company

History and Development of the Company

Our legal name is Grupo Financiero Galicia S.A. We are a financial services holding company that was incorporated on September 14, 1999, as a sociedad anónima (which is a stock corporation) under the laws of Argentina. As a holding company we do not have operations of our own and conduct our business through our subsidiaries. Banco Galicia is our main subsidiary and one of Argentina’s largest full-service banks. Through the operating subsidiaries of Tarjetas Regionales (of which Banco Galicia owns 77%), a holding company controlled by Banco Galicia, and CFA (of which Banco Galicia owns 97% and Grupo Financiero Galicia owns 3%) we provide proprietary brand credit cards throughout the “Interior” of the country and consumer finance services throughout Argentina. Argentines refer to the Interior as that part of the country’s territory different from the federal capital and the areas surrounding the city of Buenos Aires (“Greater Buenos Aires”), i.e., the provinces, including the Buenos Aires Province but excluding the city of Buenos Aires and its surroundings. Through Sudamericana and its subsidiaries we provide insurance products in Argentina. We directly or indirectly own other companies providing financial related products as explained herein. We are one of Argentina’s largest financial services groups with consolidated assets of Ps.107,314 million as of December 31, 2014.

Our goal is to consolidate our position as one of Argentina’s leading comprehensive financial services providers while continuing to strengthen Banco Galicia’s position as one of Argentina’s leading banks. We seek to broaden and complement the operations and businesses of Banco Galicia, through holdings in companies and undertakings whose objectives are related to and/or can produce synergies with financial activities. Our non-banking subsidiaries operate in financial and related activities that Banco Galicia cannot undertake or in which it is limited to invest in due to restrictive banking regulations.

Our domicile is in Buenos Aires, Argentina. Under our bylaws, our corporate duration is until June 30, 2100. Our duration can be extended by a resolution passed at the extraordinary shareholders’ meeting. Our principal executive offices are located at Teniente General Juan D. Perón 430, Twenty-Fifth floor, (C1038AAJ), Buenos Aires, Argentina. Our telephone number is (54-11) 4343-7528.

Our agent for service of process in the United States is C T Corporation System, presently located at 111 8th Avenue, New York, New York 10011.

Organizational Structure

The following table illustrates our organizational structure as of December 31, 2014. Percentages indicate the ownership interests held.

 

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All the companies shown in the chart are incorporated in Argentina, except for Galicia Uruguay, which is incorporated in Uruguay and which is currently not an operating financial institution.

 

LOGO

 

 

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History

Grupo Financiero Galicia

Grupo Financiero Galicia was formed on September 14, 1999 as a financial services holding company to hold all the shares of the capital stock of Banco Galicia held by members of the Escasany, Ayerza and Braun families. Its initial nominal capital amounted to 24,000 common shares, 12,516 of which were designated as class A ordinary (common) shares (the “class A shares”) and 11,484 of which were designated as class B ordinary (common) shares (the “class B shares”).

Following Grupo Financiero Galicia’s formation, the holding companies that held the shares in Banco Galicia on behalf of the Escasany, Ayerza and Braun families were merged into Grupo Financiero Galicia. Following the merger, Grupo Financiero Galicia held 46.34% of the outstanding shares of Banco Galicia. In addition, and due to the merger, Grupo Financiero Galicia’s capital increased from 24,000 to 543,000,000 common shares, 281,221,650 of which were designated as class A shares and 261,778,350 of which were designated as class B shares. Following this capital increase, all of our class A shares were held by EBA Holding S.A., an Argentine corporation that is 100% owned by our controlling shareholders, and our class B shares were held directly by our controlling shareholders in an amount equal to their ownership interests in the holding companies that were merged into Grupo Financiero Galicia.

On May 16, 2000, our shareholders held an extraordinary shareholders’ meeting during which they unanimously approved a capital increase of up to Ps.628,704,540 and the public offering and listings of our class B shares. All of new common shares were designated as class B shares, with a par value of Ps.1. During this extraordinary shareholders’ meeting, all of our existing shareholders waived their preemptive rights. In addition, the shareholders determined that the exchange ratio for the exchange offer would be one class B share of Banco Galicia for 2.5 of our class B shares and one ADS of Banco Galicia for one of our ADSs. The exchange offer was completed in July 2000 and the resulting capital increase was of Ps.549,407,017. At date of completion of the exchange offer, our only significant asset was our 93.23% interest in Banco Galicia.

On January 2, 2004, our shareholders held an extraordinary shareholders’ meeting during which they approved a capital increase of up to 149,000,000 preferred shares, each of them mandatorily convertible into one of our class B shares on the first anniversary of the date of issuance, to be subscribed for in up to US$100 million of face value of subordinated notes to be issued by Banco Galicia to its creditors in the restructuring of the foreign debt of its head office in Argentina (the “Head Office”) and its Cayman Branch, or cash. This capital increase was carried out in connection with the restructuring of Banco Galicia’s foreign debt. On May 13, 2004, we issued 149,000,000 preferred non-voting shares, with preference over the ordinary shares in the event of liquidation, each with a face value of Ps.1. The preferred shares were converted into class B shares on May 13, 2005. With this capital increase, our capital increased to Ps.1,241,407,017.

In August 2007, Grupo Financiero Galicia exercised its preemptive rights in Banco Galicia’s share issuance and subscribed for 93.6 million shares of Banco Galicia. The consideration paid for such shares consisted of: (i) US$102.2 million face value of notes due 2014 issued by Banco Galicia in May 2004, and (ii) cash. After the capital increase, Grupo Financiero Galicia held 94.66% of Banco Galicia’s shares, an increase from 93.60%.

In September 2013, Grupo Financiero Galicia announced that it had reached an agreement to merge Lagarcué S.A. and Theseus S.A. into Grupo Financiero Galicia. The consolidated financial statements prepared specifically for this merger were issued as of June 30, 2013 and the effective date of such merger was September 1, 2013.

This merger resulted in an increased ownership interest by Grupo Financiero Galicia in its principal subsidiary Banco Galicia of 25,454,193 class B shares of Banco Galicia representing 4.526585% of the total capital stock of Banco Galicia previously owned by Lagarcué S.A. and Theseus S.A.

Consequently, Grupo Financiero Galicia agreed to increase its capital stock by issuing 58,857,580 new class B shares representing 4.526585% of the outstanding capital stock of Grupo Financiero Galicia to be delivered to the shareholders of Lagarcué S.A. and Theseus S.A.

 

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Additionally, Grupo Financiero Galicia, together with Banco Galicia and the shareholders of Lagarcué S.A. and Theseus S.A., signed a supplemental agreement governing operational issues and providing for the settlement and mutual withdrawal of any pending claims.

All documentation related to the merger of Lagarcué S.A. and Theseus S.A. into Grupo Financiero Galicia was approved at the extraordinary shareholders’ meeting of Grupo Financiero Galicia held on November 21, 2013, including the exchange ratio and the above mentioned capital increase of Ps.58,857,580 through the issuance of 58,857,580 class B shares, with a face value of Ps.1, one vote per share, entitled to participate in the profits of the financial year beginning on January 1, 2013.

On December 18, 2013, the definitive merger agreement contemplating the merger of Lagarcué S.A. and Theseus S.A. into Grupo Galicia was registered in a public deed pursuant to the terms of paragraph 4 of article 83 of the Ley de Sociedades Comerciales (Law No. 19,550, as amended, the Commercial Corporations Law or “Corporations Law”), and effective as of September 1, 2013. Therefore, 25,454,193 class B shares of Banco Galicia, representing 4.526585% of its capital stock previously owned by Lagarcué S.A. and Theseus and S.A. were transferred to Grupo Financiero Galicia. As a result, Grupo Financiero Galicia owns 560,199,603 shares of Banco Galicia, representing 99.621742% of its capital stock and voting rights.

On February 25, 2014, the Board of Directors of Grupo Financiero Galicia resolved to issue an offer to acquire all remaining shares of Banco Galicia owned by third parties, amounting to 2,123,962 shares, at an amount of Ps.23.22 per share, which was approved by the Comisión Nacional de Valores (the “National Securities Commission”, or the “CNV”) on April 24, 2014.

On February 27, 2014, by Resolution No. 17,300, the Board of the CNV consented to the merger of Lagarcué S.A. and Theseus S.A into Grupo Financiero Galicia and to the above mentioned increase in capital of Grupo Financiero Galicia.

In compliance with Argentine regulations, Grupo Financiero Galicia made all required communications and paid the amounts corresponding to the remaining shares of Banco Galicia held by third parties. On August 4, 2014, Grupo Financiero Galicia became the owner of 100% of the outstanding capital stock of Banco Galicia when the relevant unilateral declaration to acquire the remaining shares of Banco Galicia held by third parties recorded as a public deed pursuant to Article 95 of the Law No. 26,831 (the “Capital Markets Law”, in Spanish “Ley de Mercado de Capitales”).

Moreover, on April 15, 2014, the Board of Directors approved the purchase of 95% of the capital stock of Galicia Administradora de Fondos from Banco Galicia for an amount of Ps.39 million.

Banco Galicia

Banco Galicia. is a banking corporation organized as a stock corporation under Argentine law and supervised and licensed to operate as a commercial bank by the Superintendencia de Entidades Financieras y Cambiarias (Superintendency of Financial Institutions and Exchange Bureaus or the “Superintendency”).

Banco Galicia was founded in September 1905 by a group of businessmen from the Spanish community in Argentina and initiated its activities in November of that year. Two years later, in 1907, Banco Galicia’s stock was listed on the Buenos Aires Stock Exchange (“BASE”). Banco Galicia’s business and branch network increased significantly by the late 1950s and continued expanding in the following decades, after regulatory changes allowed Banco Galicia to exercise its potential and gain a reputation for innovation, thereby achieving a leading role within the domestic banking industry.

In the late 1950s, Banco Galicia launched the equity mutual fund FIMA Acciones and founded the predecessor of the asset manager Galicia Administradora de Fondos. Beginning in the late 1960s Banco Galicia began to establish an international network mainly comprised of branches in New York and in the Cayman Islands, a bank in Uruguay and several representative offices.

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information and fund transfer services, in 1985, Banco Galicia established, together with four other private- sector banks operating in Argentina, Banelco S.A. to operate a nationwide automated teller system, which became the largest in the country. During the same year, Banco Galicia also acquired an interest in VISA Argentina S.A., and is currently one of the largest issuers of such cards in Argentina.

During the 1990s, Banco Galicia implemented a growth and modernization strategy directed at achieving economies of scale and increasing productivity and, therefore, heavily invested in developing new businesses, acquiring new customers, widening its product offering, developing its IT and human resources capabilities, and expanding its distribution capacity. This was comprised of traditional channels (branches) and, especially, alternative channels, including new types of branches (in-store for example), ATMs, banking centers, phone banking and internet banking.

As part of its growth strategy, in 1995 Banco Galicia began a new expansion phase into the Interior of Argentina where high growth potential was believed to exist. Typically the Interior is underserved relative to Buenos Aires and its surroundings with respect to access to financial services and its population tends to use fewer banking services. Between 1995 and 1999, Banco Galicia acquired equity interests in entities or formed several non-banking companies providing financial services to individuals in the Interior through the issuance of proprietary brand credit cards. See “-Regional Credit Card Companies” below. In addition, in 1997, Banco Galicia acquired a regional bank that was merged into it, with branches located mainly in Santa Fe and Córdoba, two of the wealthiest and more populous provinces.

In order to fund its strategy, during the 1990s, Banco Galicia tapped the international capital markets for both equity and debt. In June 1993, Banco Galicia carried out its initial international public offering in the United States and Europe and, as a result, began to list its American Depositary Receipts (“ADRs”) on the Nasdaq Stock Market until 2000, when Banco Galicia’s shares were exchanged for our shares. In 1991, it was the first Argentine bank to issue debt in the European capital markets and, in 1994, it was the first Latin American issuer of a convertible bond. In 1996, Banco Galicia raised equity again through a local and international public offering.

In 1996, Banco Galicia entered the bank insurance business through an agreement with ITT Hartford Life Insurance Co. for the joint development of initiatives in the life insurance business. In this same year, Banco Galicia initiated its internet presence, which evolved into a full e-banking service for both companies and individuals.

At the end of 2000, Banco Galicia was the largest private-sector bank in the Argentine market with a 9.8% deposit market share.

In 2001 and 2002 Argentina experienced a severe political and financial crisis, which had a material adverse effect on the financial system and on financial businesses as a whole, including Banco Galicia, but especially on financial intermediation activity. However, during the crisis, the provision of banking services of a transactional nature was maintained. With the normalization of the Argentine economy’s situation and the subsequent growth cycle that began in mid-2002, financial activities began to expand at high rates, which translated into high growth at the level of the financial system as a whole, including Banco Galicia. The provision of services continued to develop, even further than prior to the crisis, and financial intermediation resumed progressively.

Beginning in May 2002, Banco Galicia began to implement a series of initiatives to deal with the liquidity shortage caused by the systemic deposit run, the unavailability of funding and other adverse effects of the 2001-2002 crisis on the financial system as a whole. Banco Galicia significantly streamlined its operations and reduced its administrative expenses and, immediately after launching such initiatives, restored its liquidity. Also, in late 2002 and early 2003, Banco Galicia closed all of its operating units abroad or began to wind them down. In addition, Banco Galicia: (i) restructured most of its commercial loan portfolio, a process that was substantially completed in 2005, (ii) restructured its foreign debt, a process that began in 2002 and that was completed in May 2004, and resulted in an increase in its capitalization, and (iii) in February 2004, finalized the restructuring of its debt with the Argentine Central Bank incurred as a consequence of the 2001-2002 crisis.

Together with the launching of the above-mentioned initiatives, Banco Galicia began to normalize its activities, progressively restoring its customer relations and growing its business with the private sector. In 2007, Banco Galicia finalized the full repayment of its debt with the Argentine Central Bank incurred as a consequence of the 2001-2002 crisis. In addition, in August 2007, Banco Galicia repaid in full the notes that it had issued to

 

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restructure the debt of its New York Branch and undertook a share offering to increase its capitalization, in order to be able to support the increase in regulatory capital requirements on a bank’s exposure to the public sector and the growth of its business with the private sector.

On June 1, 2009, Banco Galicia entered into a stock purchase agreement with AIG and with AIG Consumer Finance Group Inc. for the purchase of the shares of CFA, Cobranzas y Servicios S.A. and Procesadora Regional S.A. (collectively the “CFA Group”), Argentine companies that are involved in financial and related activities.

Pursuant to Resolution No. 124, dated June 7, 2010, the Argentine Central Bank authorized the purchase of the shares of the CFA Group by Banco Galicia and Tarjetas Regionales and on August 31, 2010, through Resolution No. 299, the National Commission for the Defense of Competition (Comisión Nacional de Defensa de la Competencia) approved the transaction. The purchase of the shares of the CFA Group was completed by Banco Galicia (95%) and Tarjetas Regionales (5%) on June 24, 2010. The price to acquire the shares of these companies was Ps.334 million. This purchase was financed with Banco Galicia’s available cash, within its ordinary course of business. During the fiscal year ended December 31, 2011, the 5% interest held by Tarjetas Regionales was acquired by Grupo Financiero Galicia and Banco Galicia, which acquired 3% and 2% of such interest, respectively. Following such acquisition, Banco Galicia held a 97% interest in CFA. See “-Compañía Financiera Argentina” below.

On February 25, 2014, Grupo Financiero Galicia, which controled 99.62% of the shares of Banco Galicia, resolved to issue an offer to acquire the 2,123,962 shares of Banco Galicia owned by third parties. On April 24, 2014, said transaction was approved by the CNV and on July 14, 2014, it was incorporated by the Argentine Superintendency of Corporations. Currently, 100% of the outstanding capital stock of Banco Galicia is owned by Grupo Financiero Galicia. See “-Grupo Financiero Galicia” above.

In addition, Banco Galicia requested to delist its shares from the BASE to become a privately held company. Banco Galicia’s quotation was suspended on April 30, 2014. On August 21, 2014, the CNV approved Banco Galicia’s request to delist its shares from the BASE.

On April 15, 2014, Banco Galicia sold its interest in Galicia Administradora de Fondos to Grupo Financiero Galicia for Ps.39 million.

During the third quarter of fiscal year 2014, Banco Galicia sold to Visa Argentina S.A., a company in which the Bank has a 15.9% equity interest, its equity investment in Banelco S.A., for Ps.40 million.

Restructuring of the Foreign Debt of Banco Galicia’s Head Office in Argentina and its Cayman Branch

On May 18, 2004, Banco Galicia successfully completed the restructuring of US$1,321 million of the debt of Banco Galicia’s Head Office and its Cayman Branch, consisting of bank debt (including debt with multilateral credit agencies) and bonds. This amount represented 98% of the foreign debt eligible for restructuring. As of December 31, 2014, the principal amount of old debt, the holders of which did not participate in the exchange offer was US$1 million.

Banco Galicia paid creditors who elected to participate in the cash offer and the Boden offer and issued (i) US$649 million of long-term Dollar-denominated debt instruments, of which US$465 million were Dollar-denominated notes due 2014 (referred to as the “2014 Notes”) and (ii) US$400 million of medium-term Dollar-denominated debt instruments, of which US$353 million were Dollar-denominated notes due 2010 (referred to as the “2010 Notes”).

In January 2010, Banco Galicia paid the last amortization installment of its 2010 Notes, for a principal amount of US$34 million and in November 2010, Banco Galicia redeemed all its 2014 Notes, for an outstanding principal amount of US$102 million.

During February 2011, Banco Galicia partially redeemed capitalized interest of its Subordinated Notes Due 2019 for US$90 million (and accrued interest thereof for US$1.4 million), which amount was capitalized between January 1, 2004 and December 31, 2010, and was originally scheduled to be paid on January 1, 2014.

 

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In addition, in December 2011, with respect to such notes, Banco Galicia made an advance payment of interest, including both interests that capitalized from January 1, 2011 to June 30, 2011, of US$6 million, and accrued interest thereof for US$0.3 million. Such payment was originally scheduled to be made on January 1, 2014.

In January 2014, Banco Galicia paid cumulative interest accrued on these notes from July 1, 2011 to December 31, 2013 for US$29 million.

As of December 31, 2014, the outstanding principal amount of debt resulting from the above-mentioned restructuring amounted to US$224 million. For more information see Item 5.A. “Operating Results-Contractual Obligations” and “Operating Results-Funding”.

Grupo Financiero Galicia holds a credit against Banco Galicia for a face value of US$10 million, as a result of the acquisition from third parties of subordinated loans maturing in 2019.

Banco Galicia Uruguay S.A. and Galicia (Cayman) Ltd.

In 1983, Galicia Uruguay was established as a “Casa Bancaria”, a license that granted an offshore status, as an alternative service location for Banco Galicia’s customers. In September and October 1999, the Uruguayan government’s executive branch and the Uruguayan Central Bank, respectively, approved Galicia Uruguay’s status as a full service domestic bank.

Due to the effects of the 2001-2002 crisis on Galicia Uruguay, in early 2002, the Central Bank of Uruguay suspended its activities and assumed control and management of Galicia Uruguay. In December 2002, Galicia Uruguay restructured its deposits into debt maturing in 2011. On June 1, 2004, Galicia Uruguay’s license to operate as a domestic commercial bank was revoked by the Central Bank of Uruguay, but it retained the license from the Uruguayan government’s executive branch. Control and management of Galicia Uruguay by the Central Bank of Uruguay ended on February 22, 2007. On May 15, 2009, Galicia Uruguay made available to its clients in advance US$27 million, corresponding to the remaining balance of its restructured debt, which was initially due in September 2011. Therefore and having fulfilled its obligations, its shareholders have resolved, at the shareholders’ meeting held on June 30, 2010, to voluntarily dissolve and liquidate the company.

Furthermore, taking into consideration the financial condition and the evolution estimated in the liquidation process, shareholders decided to reduce the company’s computable capital for a value equal to US$2.1 million through the voluntary redemption of shares, which was carried out on October 18, 2010. During 2013 and 2014, shareholders decided two new voluntary redemptions of shares. These redemptions were carried out for a value equal to US$2.1 million and US$3.3 million, on November 18, 2013 and September 10, 2014, respectively.

As of the date of this annual report, Galicia Uruguay is in the process of being liquidated and therefore was not engaged in any active business and its restructured debt (time deposits and notes) has been repaid in full.

Galicia Cayman was established in 1988 in the Cayman Islands as another alternative service location for Banco Galicia’s customers. Galicia Uruguay’s situation adversely affected its subsidiary Galicia Cayman, which commenced voluntary liquidation and surrendered its banking license effective as of December 31, 2002. In May 2003, Galicia Cayman together with the provisional liquidators designated by the Grand Court of the Cayman Islands completed a debt restructuring plan and, with the authorization of such Court, presented it to all of its creditors for their consideration. The plan was approved in whole on July 10, 2003 by the vote of 99.7% of its creditors, exceeding the legal majority required, and became effective and mandatory for all creditors. On February 2, 2006, the Grand Court of the Cayman Islands declared the plan as terminated and ended the involvement of any third parties in the company’s management beginning on February 23, 2006.

In March 2014, Galicia Cayman shareholders’ approved the move of the registered office of the company from the Cayman Islands to Argentina. Galicia Cayman was incorporated in Argentina by the Provincial Registry of Corporations of the Province of Mendoza as Galicia Cayman S.A.

In September 2014, the Bank entered into a preliminary agreement to merge Galicia Cayman into the Bank, effective as of October 1, 2014. The Bank controlled 99.989% of the shares of Galicia Cayman and had an option to purchase the remaining 0.011% which was owned by Cobranzas y Servicios SA. In November 2014, the Bank’s shareholders’, through an extraordinary shareholders’ meeting, exercised the above mentioned option and proceeded to implement the dissolution without liquidation of Galicia Cayman.

 

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Regional Credit Card Companies

In the mid-1990s, Banco Galicia made the strategic decision to target the “non-account holding” individuals market, which, in Argentina, typically includes the low and medium-low income segments of the population who live in the Interior of the country, in addition to certain locations of the Greater Buenos Aires. To implement this strategic decision, in 1995 Banco Galicia began investing in non-bank companies (the “Regional Credit Card Companies”) operating in certain regions of the Interior, providing financial services to individuals through the issuance of credit cards with proprietary brands and extending credit to its customers through such cards.

In 1995, Banco Galicia made the first investment in this business by acquiring a minority stake in Tarjeta Naranja S.A. (“Tarjeta Naranja”) and in 1997 increased its ownership to 80%. This company had begun operations in 1985 in the city of Córdoba, by marketing “Tarjeta Naranja”, its proprietary brand credit card, in this city and had enjoyed local growth.

In 1996, Banco Galicia formed Tarjetas Cuyanas S.A. (“Tarjetas Cuyanas”), to operate in the Cuyo Region (the provinces of Mendoza, San Juan and San Luis) in partnership with local businessmen. This company launched the “Nevada Card” in May 1996 in the city of Mendoza. Also in 1996, Banco Galicia formed a new company, Tarjetas del Mar S.A. (“Tarjetas del Mar”), to operate in the city of Mar del Plata and its area of influence. Tarjetas del Mar began marketing the “Mira” card in March 1997.

In early 1997, Banco Galicia purchased an interest in Comfiar S.A., a consumer finance company operating in the provinces of Santa Fe and Entre Ríos, which was merged into Tarjeta Naranja in January 2004.

In 1999, Banco Galicia reorganized its participation in this business through Tarjetas Regionales, a holding company wholly owned by Banco Galicia and Galicia Cayman, which owns the shares of Tarjeta Naranja, Comfiar S.A., Tarjetas Cuyanas, and Tarjetas del Mar. In addition, between 1999 and 2000, Tarjetas Regionales acquired Tarjetas del Sur S.A., a credit card company operating in southern Argentina. In March 2001, Tarjetas del Sur S.A. merged into Tarjeta Naranja.

During 2012, the ownership interests in Tarjetas Regionales and its operating subsidiaries were modified due to the following events:

 

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

 

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

During May 2014, an extraordinary shareholders’ meeting of Tarjetas del Mar approved a capital increase of Ps.32 million, which was fully subscribed for by Sociedad Anónima Importadora y Exportadora de la Patagonia. As a consequence, the Bank currently holds a 58.8% equity interest in Tarjetas del Mar, while Compañía Financiera Argentina holds a 1.2% equity interest and Sociedad Anónima Importadora y Exportadora de la Patagonia holds the remaining 40%.

As of December 31, 2014, Banco Galicia held 77% of Tarjetas Regionales. In turn, Tarjetas Regionales directly and indireclty held 100% of Tarjeta Naranja and 100% of Tarjetas Cuyanas.

These companies have experienced a significant expansion of their customer bases, in absolute terms and with respect to the range of customers served, number of cards issued, distribution networks and size of operations, as well as a technological upgrade and general modernization. By mid 1995, Tarjeta Naranja had approximately 200,000 cards outstanding. As of December 31, 2014, the Regional Credit Card Companies, on a consolidated basis, had approximately 9 million issued cards and were the largest proprietary brand credit card operation in Argentina.

 

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In terms of funding, the Regional Credit Card Companies have historically used one or more of the following third party sources of financing: merchants, bond issuances, bank loans and other credit lines, financial leases and securitizations using financial trust vehicles. This diversification has allowed the Regional Credit Card Companies to maintain and expand their business without depending excessively on one single source or provider.

The business operations of the Regional Credit Card Companies are exposed to foreign exchange rate fluctuations and interest rate fluctuations; however, they mitigate the foreign exchange rate risk in respect of their business and operation through hedging transactions and to try to offset their interest rate exposure with assets that bear interest at similar floating rates. In addition, the Regional Credit Card Companies have an overall liquidity policy to have sufficient liquidity to cover at least three months of future operations and they also formulate a cash flow projection for each upcoming year. These internal policies and practices ensure adequate working capital through which the Regional Credit Card Companies protect their operations against short-term cash shortages, allowing them to focus on expanding their business and continuously better serving their clients.

In addition, Tarjeta Naranja has exported its business model to the Dominican Republic, where it commenced operations in 2007 through a joint venture with Grupo León, and to Peru, where we commenced operations in 2011 through a joint venture with Banco de Crédito del Perú. As of the end of the second quarter of 2012, Tarjeta Naranja Dominicana S.A.’s shareholders decided to sell to Banco Múltiple León S.A. (holder of the remaining 50% interest in Tarjeta Naranja Dominicana S.A.’s capital stock) Tarjeta Naranja Dominicana S.A.’s rights related to customers and to start the liquidation of the company. Later, on October 14, 2014, Tarjeta Naranja entered into the final agreement to transfer its interest in Tarjeta Naranja Perú (a joint venture, equivalent to 24% of the capital stock of such company, to Grupo Crédito S.A. for US$900,000. As of the date of this annual report, the shares have been transferred.

Compañía Financiera Argentina

CFA is a financial company which operates under the Financial Institutions’ Law and other regulations set forth by the Argentine Central Bank.

CFA is a leading financial company in Argentina in the personal loans business, providing consumer personal loans through different products. Within this framework, CFA grants unsecured personal loans within the Argentine territory, mainly through its “Efectivo Sí” offices, intermediary entities (mutuals, unions, cooperatives, etc.) and the financing of purchases through its affiliated merchants. It also issues credit cards, but on a small scale.

CFA had different names before adopting its current name. It was originally set up under the name “Río de la Plata Sociedad Anónima Comercial y de Financiaciones” on August 16, 1960, and in 1977 the name was changed to “Burofinanz S.A. Compañía Financiera” (authorized by Resolution No. 424 of the Argentine Central Bank, dated December 29, 1977).

In 1992, CFA carried out its commercial activities under the name “Interbonos Compañía Financiera S.A.” (authorized by Resolution No. 284 of the Argentine Central Bank, dated June 17, 1992), as agent of the Mercado Abierto (fixed income brokerage) and later it shifted its activities to personal financing, providing small loans through retail merchants for the acquisition of different consumer goods. In 1994, it created “Efectivo Sí”, which is a product aimed at satisfying the financial needs of the “non-bankarized” population sector, or that segment of the population characterized by limited interaction with traditional banks.

In 1995, Banco de Crédito Argentino acquired an interest in the company’s capital stock and later Banco de Crédito Argentino was acquired by BBVA Banco Francés S.A., which became the major shareholder of CFA. Subsequently, the “División Convenios” (Agreements Division) was created, which allowed CFA to enter the market of agreements with mutuals, unions, cooperatives and other intermediary organizations, and grant loans to its associates.

 

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The Argentine Central Bank, through its Resolution No. 85 dated February 7, 1996, registered CFA’s change of denomination to “Compañía Financiera Argentina S.A.” and authorized it to operate as a financial company under the Financial Institutions’ Law, thus allowing CFA to initiate its activities since February 27, 1996.

In 1998, most of CFA’s capital stock was acquired by AIG Consumer Finance Group Inc., a company controlled by AIG American International Group Inc. Six years later, in 2004, the “Cuota Sí” product was designed, aimed at financing purchases through affiliated merchants.

In June 2010, Compañía Financiera Argentina was acquired by Banco Galicia and Tarjetas Regionales, with an interest in CFA’s capital stock of 95% and 5%, respectively.

During fiscal year 2011, the 5% interest held by Tarjetas Regionales was acquired by Grupo Financiero Galicia and Banco Galicia, which acquired 3% and 2% of such interest, respectively. Following such acquisition, Banco Galicia held a 97% interest in CFA.

Sudamericana Holding

In 1996, Banco Galicia entered the bank insurance business, through the establishment of a joint venture with Hartford Life International to sell life insurance and annuities, in which it had a 12.5% interest. In December 2000, Banco Galicia sold its interest in this company and purchased 12.5% of Sudamericana, a subsidiary of Hartford Life International. As a result of various acquisitions, Grupo Financiero Galicia owns 87.5% of Sudamericana (with the remaining 12.5% being held by Banco Galicia) which offers life, retirement, property and casualty insurance products in Argentina through its subsidiaries Galicia Seguros S.A. (“Galicia Seguros”), which provides property, casualty and life insurance, Galicia Retiro Compañía de Seguros S.A. (“Galicia Retiro”), which provides retirement insurance and Galicia Broker Asesores de Seguros S.A. (“Galicia Broker”)., an insurance broker

In addition, during fiscal year 2012 Galicia Seguros, together with other three insurance companies, created Nova Re Compañía Argentina de Reaseguros S.A., the goal of which is to increase the scope of offerings of reinsurance products in Argentina.

Galicia Administradora de Fondos

Incorporated in 1958, Galicia Administradora de Fondos manages the FIMA family mutual funds that are distributed by Banco Galicia through its multiple channels (network of branches and home banking and investment centers, among others). The company’s team is comprised of asset management professionals whose goal is to manage FIMA family funds in order to meet the demand of individuals, companies and institutions. The assets of each fund are distributed across a variety of assets, such as bonds, negotiable obligations, trusts, shares and deposits, among others, in line with the fund’s investment objective.

On April 15, 2014, Banco Galicia sold its 95% interest in Galicia Administradora de Fondos to Grupo Financiero Galicia.

Its shareholders are Grupo Financiero Galicia, with a 95% stake, and Galicia Valores, with the remaining 5%.

Net Investment

Net Investment was established in February 2000 as a holding company (87.5% owned by Grupo Financiero Galicia and 12.5% owned by Banco Galicia) whose initial purpose was to invest in and develop businesses related to technology, communications, internet connectivity and web contents. Net Investment has performed its activities in the areas of business to business e-commerce, with the purpose of creating and exchanging synergies with Banco Galicia’s business activities.

During the 2011 fiscal year, the shareholders decided to amend the corporate purpose of Net Investment to be able to invest in additional companies in related, accessory and/or supplementary activities.

 

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Galicia Warrants

Galicia Warrants was founded in April 1993, when it obtained the authorization from the relevant authorities to store goods and issue certificates of deposits of goods and warrants under the provisions of Law No. 9,643.

Galicia Warrants is a leading company in the deposit certificates and warrants issuance market and its main customers belong to the agricultural, industrial and agro-industrial sectors, as well as exporters and retailers. Its main objective is to enable its customers to access credit and financing, which are secured by the property kept under custody. Its shareholders are Grupo Financiero Galicia, with an 87.5% stake, and Banco Galicia, with the remaining 12.5%

Business

Banking

Banco Galicia, our largest subsidiary, operates in Argentina and substantially all of its customers, operations and assets are located in Argentina. Banco Galicia is a bank that provides, directly or through its subsidiaries, a wide variety of financial products and services to large corporations, small and medium-sized companies, and individuals.

Banco Galicia is one of Argentina’s largest full-service banks and is a leading provider of financial services in Argentina. According to information published by the Argentine Central Bank, as of December 31, 2014, Banco Galicia ranked second in terms of assets, deposits and loan portfolio within private-sector banks in Argentina. As of the same date, Banco Galicia also ranked first among private-sector domestic banks in terms of assets, loans and deposits. Its market share of private sector deposits and of loans to the private sector was 8.79% and of 8.78% respectively, as of the end of 2014. On a consolidated basis, as of the end of fiscal year 2014, Banco Galicia had total assets of Ps.105,962 million, total loans of Ps.66,593 million, total deposits of Ps.64,708 million, and its shareholders’ equity amounted to Ps.9,899 million.

Banco Galicia provides a full range of financial services through one of the most extensive and diversified distribution platforms amongst private-sector financial institutions in Argentina. This distribution platform, as of December 31, 2014, was comprised of 261 full service banking branches, located throughout the country, 1,684 ATMs and self-service terminals owned by Banco Galicia, phone banking and e-banking facilities. Banco Galicia’s customer base, on an unconsolidated basis, was comprised of nearly 3 million customers, who were comprised of mostly individuals but who also included more than 77,000 companies. Banco Galicia has a strong competitive position in retail banking, both with respect to individuals and small- and medium-sized companies. Specifically, based on internal studies undertaken by Banco Galicia, it is estimated that Banco Galicia is one of the primary providers of financial services to individuals, one of the largest providers of credit cards, the primary private-sector institution serving the small- and medium-sized companies sector, and has traditionally maintained a leading position in the agriculture and livestock sectors. Banco Galicia’s primary clients are classified into two categories, the Wholesale Banking Division and the Retail Banking Division.

For a breakdown of Banco Galicia’s revenues by category of activity for the last three financial years, see Item 5.A. “Operating Results-Results by Segments-Banking.”

Wholesale Banking

The Wholesale Banking division manages and builds the relationships with companies from all economic sectors and supports its business model by being closely related to its corporate customers, providing dedicated and focused services.

Banco Galicia has granted across Argentina multiple credit lines to companies to finance needs ranging from working capital to medium- to long-term investment projects.

 

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The offer of Peso and Dollar-denominated medium- and long-term financing continued being improved through a broad offer of agreements with domestic and international agencies, such as the Inter-American Development Bank (“IDB”), FONTAR (Fondo Tecnológico Argentino), and the Bank for Investment and Foreign Trade (“BICE”), among others. Additionally, the benefits of all subsidized credit lines or lines with special conditions offered by the national and provincial public sector were offered to customers.

Through the “Credit Line for Productive Investment” (a credit line that is required to be offered by financial entities pursuant to Communication “A” 5380 and Communication “A” 5449) in order to finance investment projects to purchase capital goods and/or to finance the construction of facilities to produce goods and/or services and to market goods (excluding inventories), Banco Galicia disbursed more than Ps.5,300 million for approximately 5,900 loans to finance investment projects and more than 58,000 promissory note transactions. It is noteworthy that over 80% of the above-mentioned amount relates to financing for micro-, small- and medium-sized companies.

Galicia Office, Banco Galicia’s corporate e-banking service, provides a quick, dynamic and safe channel to manage the online accounts of corporate customers and continues to grow year after year. In this respect, Galicia Office’s transaction volumes increased by 51% as compared to fiscal year ended December 31, 2013.

During fiscal year 2014, the new version of Galicia Office, Galicia Office 3.0, was implemented, built on four focal points: design, user-friendliness, functionality and security.

These new features, along with improvements to menus, access and several other functionalities, continued to enhance customers’ internet transactions. Banco Galicia personnel also visited different areas of Argentina in order to communicate news about this product-channel.

In fiscal year 2014, Banco Galicia sought to establish its reputation as a bank that offers treasury solutions to companies and focused on developing new products that would allow it to differentiate itself from other players in the market. The introduction of the new payments menu which includes, for example, a self-service option for the delivery of checks for payments to suppliers, the ability to write checks online, and the ability to view checks for the payment to suppliers for non-customers through e-banking stood out.

Corporate Banking

This segment is comprised of companies and/or economic groups with annual sales over Ps.700 MM, multinational companies and listed companies. During fiscal year 2014, the Bank maintained its leading position and consolidated its presence in Corporate Banking, achieving first place in the Business-to-Business perceived quality ranking created by Mercado magazine. This was attained thanks to an effective commercial planning, the improvement in the service offering and the implementation of a differentiated advisory model, which allows the Bank to be close to its customers, meeting their different needs.

The constant search for tailor-made solutions, through the ongoing financial support and the cash management service offering, made it possible for the Bank to increase its treasury volumes by more than 60% as compared to the previous fiscal year.

During 2014, the Bank strengthened its position in syndicated loans and corporate debt issuances under the public offering system (notes and financial trusts) through its completion of leading more than 75 transactions, thus doubling the number of transactions conducted during 2013.

With respect to foreign trade transactions, the service model for such segment was supplemented in order to provide more expedient and tailor-made professional services in respect of the same.

Companies

This segment is comprised of companies whose revenues range from Ps.70 million to Ps.700 million. Among these types of companies, Banco Galicia is the leading bank in the segment, standing out in all business sectors. There are a total of 19 corporate banking centers throughout Argentina.

 

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The synergy with the network of branches, supplemented with a team of professionals at each center specialized in foreign trade, treasury solutions, the agricultural sector and companies, is focused on offering a comprehensive service that is tailor-made to each business, with decentralized and regional decision and resolution.

The companies serviced by this segment increased their cross-selling again in 2014 and their number of transactions through the usual channels and primarily by joining Galicia Office and receiving its services.

Agricultural and Livestock Sector

For the ninth year in a row, according to the annual survey of ICASA/Mora y Araujo Consultant for Chacra Magazine that establishes the best positioned brands in this sector, Banco Galicia was ranked first among private banks in the agriculture and livestock sector.

Tarjeta Galicia Rural holds more than 37% of the market share of credit card-related transactions in this segment, having experienced a 36% increase in sales volumes, as compared to the 2013 fiscal year. More than 95 interest-free agreements were entered into with leading agricultural and livestock sector companies.

Noteworthy among the business activities carried out during the 2014 fiscal year were multiple financing offers to finance agricultural campaigns, including the structuring of loans to best suit each producer’s needs and the development of capital market transactions for such segment.

During the 2014 fiscal year, the twelfth edition of the Excelencia Agropecuaria La Nación - Banco Galicia Award (La Nación-Banco Galicia’s Agricultural Excellence Award) was achieved and Banco Galicia - Revista Chacra a la Gestión Solidaria del Campo Award (Banco Galicia-Chacra Magazine’s Rural Solidarity Award) and CAPA-Banco Galicia Award to the agricultural journalism were granted.

As in prior fiscal years, the Bank supported the research and outreach activities of Universidad Austral. The Bank also continued supporting the activities of the Fundación Producir Conservando, and the work of Asociación Argentina de Productores en Siembra Directa (Argentine Association of No-till Farming), as well as different activities promoted by Consorcios Regionales de Experimentación Agrícola (Agricultural Experimentation Regional Consortiums).

Foreign Trade

During the 2014 fiscal year, the foreign trade volumes (imports plus exports) amounted to US$12,023 million, which accounts for 9% of the trade balance.

Out of the total foreign trade transactions, 64% were carried out through electronic banking, representing a 36% increase as compared to fiscal year 2013.

During 2014, adjustments were made to the e-platform used for foreign trade transactions which improvements provided for a faster, more secure and more interactive tool for these customers to use from their offices.

Within the LEAN program, a methodoloty which aims to add value to products and services provided by the Bank and also to apply the most efficient practices and continuosly look for improvement oportunities, the Bank continued to develop and update the foreign trade operating system, seeking increased efficiency and customer service.

Capital Markets and Investment Banking

Banco Galicia’s capital market activity is focused on corporate debt transactions and, to a lesser extent, on securitization transactions. In addition, Banco Galicia contributes to the optimization of its affiliated companies’ financing strategies.

 

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Non-Financial Public Sector

Services provided to the non-financial public sector include e-collection and payment solutions to various agencies, municipalities and universities, with technology-based, value-added solutions that facilitate and enhance daily operations according to transactional needs.

During 2014, non-financial public sector work was intended to strengthen the use of foreign trade tools among customers.

Through a business campaign targeting companies on the Automotive Property Registry, a 50% market share was achieved at national level, generating a new source of income and transactional deposits, as well as a source of customers to generate new payroll direct deposit.

In line with Banco Galicia’s strategy to generate increased transactional deposits, an alternative form of time deposit that can be cancelled before its maturity was offered to public sector customers for the first time in 2014. Bank Galicia also continued with its rollout and offering of collections and payment products to the public sector.

Retail Banking

The Retail Banking Division manages Banco Galicia’s business with individuals from all income brackets, micro and smaller businesses (i.e., those businesses with annual revenues below Ps.70 million) and small retailers and professionals. Retail Banking provides a wide range of financial products and services, encompassing transactions, loans, and investments. On the transactions side, Banco Galicia offers its customers checking and savings accounts, credit and debit cards, and payroll direct deposit, among other services. Banco Galicia’s customers have access to its services through its branch network as well as through its electronic distribution channels. See “-Sales and Marketing.”

During 2014, in order to continue creating a specialized experience focused on the customer and to consolidate the leadership in the High-Income segment, the Bank developed new proposals for the Business and PyMEs segment (comprised by self employed individuals and small- and and medium-size companies).

The Bank also continued to take the lead in payroll direct deposit, increasing by 4% the number of customers, as compared to 2013, which lead to an increase in its market share.

The Retail Banking Division’s customer base grew 7% during 2014, exceeding 2 million customers.

In particular, the Business and PyMEs segment had a 13% increase in its customer base. The most important business achievements for such segment were the 9% increase in payroll accounts and, in terms of credit, the extending of loans as part of the Credit Line for Productive Investment for over Ps.1,100 million.

In turn, the Galicia Éminent service, a service aimed at the high-income customer segment, showed an interannual growth of 11%. In a highly competitive environment, as a result of the attractiveness of the segment, Galicia Éminent managed to be ranked first, based on studies conducted by private consulting firms in terms of service, and maintained its leadership position in premium credit card consumption throughout the year, as per the information furnished by Visa and Mastercard.

The “Move” service, an offering for the young people segment, began being marketed during 2014, seeking to attract many new customers at a low cost while also positioning the Bank as a leader in this new segment.

In the general income segment, the specific needs of customers were addressed by dividing the customers into sub-segments. First, for customer with a medium-high income, the Bank worked on relaunching the “Prefer” value offering, which relaunch generated an increase in the consumption and satisfaction level of these customers. For the medium income sub-segment, the Bank worked hard on implementing a contact policy to develop customers who established relationships through indirect channels and who became increasingly important during this year.

Furthermore, the Bank worked on improving its efficiency by reviewing the profitability of channels and moving transactions between channels, always taking into account the customers’ preferences or habits.

 

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The Business Intelligence Division also worked on implementing the contact policy in order to acquire new customers and to sell new products to existing clients, communicate benefits, foster the use of different channels for the purpose of improving the activation and cross-selling new products after such new clients joined. In terms of relational communication, there was a 72% growth, as compared to 2013.

During the second half of 2014, the Bank also focused on the business intelligence service by the Wholesale Banking Division. This synergy between the wholesale Banking Division and the Retail Banking Division allowed adopting the best practices of both banking services and creating increased efficiency in the use of resources, increasing the volume of contacts to customers from the area.

The Private Banking Division offers professional financial services to individuals with medium- to high- net worth, through the management of their investments and the provision of financial advisory services. Private Banking offers its customers a wide range of domestic financial investment alternatives, such as deposits, FIMA mutual funds, government and corporate securities, as well as trusts and notes where Banco Galicia acts as an arranger.

One of the Private Banking premises, in line with the Bank’s strategy to differentiate itself from competitors through service quality, is the preferential treatment of its customers. In this regard, the service has a wide network of highly-trained officers, an investment center that operates from 8 a.m. to 6 p.m. and exclusive spaces for service.

In 2014, the Private Banking Division obtained the recertification of its Service Model under ISO 9001.

The credit and debit card business continued its strong growth during 2014, with a 40% increase in purchases, as compared to 2013, and over 210 million transactions during 2013, representing a 5% increase as compared to transactions during 2013. The Bank’s market share in the banking means of payment (i.e., credit and debit cards business) reached 12.3%.

During the 2014 fiscal year, over 370,000 primary cards and 330,000 additional cards were issued, totaling approximately 4 million cards. With approximately 2,500 business agreements, Banco Galicia provides benefits to its customers at approximately 12,000 stores in various industries and throughout the country.

Through the program to encourage consumption and production of goods and services called “AHORA 12” (NOW 12 Installments), Ps.556 million were financed from its beginning in September to year-end.

Regarding customers’ rewards for their relation with the Bank and the use of bank products, customers can take advantage of several benefits through the Quiero! Fidelity Program and plan trips through the QuieroViajes program.

Banco Galicia’s extensive network of branches is one of the key components of its distribution network, and one of its most important competitive advantages. Banco Galicia’s distribution network is supported by its intranet, information technology systems, customer incentives offered in connection therewith and the constant monitoring of its customer service quality.

As of December 31, 2014, Banco Galicia’s geographical distribution of its branches was as follows:

 

Geographical Area

   Number of Branches  

City of Buenos Aires and Greater Buenos Aires

     152   

Rest of the Province of Buenos Aires

     34   

Santa Fe

     16   

Córdoba

     15   

Mendoza

     9   

Chubut

     5   

Entre Ríos

     4   

Río Negro and Tucumán

     3  each 

Corrientes, La Pampa, Misiones, San Luis and Tierra del Fuego

     2  each 

Catamarca, Chaco, Formosa, Jujuy, La Rioja, Neuquén, Salta, Santa Cruz, Santiago del Estero and San Juan

     1  each 
  

 

 

 

Total

  261   
  

 

 

 

 

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Apart from its branches, Banco Galicia uses Red Galicia 24 (Banco Galicia’s ATM and self-service terminals network), the bancogalicia.com portal, Galicia Servicios Móviles, its Retail Sales Unit, and the Commercial Planning area of its Customer Contact Center, which are service, transactional and sales channels focused on individual and corporate customers.

Banco Galicia’s ATMs and self-service terminals provide its customers with a means of solving their transactional needs in a simple, safe and affordable way, on a 24/7 basis. They are distributed all over the country in the branch network and other locations, such as gas stations, supermarkets and shopping malls.

The bancogalicia.com website makes it possible for customers to request products according to their needs with the assistance of an interactive advisor, obtain information on promotions in the innovative benefits catalogue, and get information about all the products and services offered by Banco Galicia. It also facilitates access to Banco Galicia’s specific web pages for both individuals (Galicia home banking) and companies (Galicia Office), allowing customers to access Banco Galicia’s products and services from any location, 365 days a year.

Galicia Servicios Móviles application for smart phones simplifies access to services from cell phones. With the right design to fit the screen of these devices, customers may perform queries, make investments, transfer money and pay bills, including credit card bills.

In 2014, the Indirect Channels Division was created, its mission is to develop internal and external channels to attract new customers and market Consumer Banking products. The area is made up of the Retail Sales Unit (especially focused on cross-selling and attraction of customers based on their salaries), the Indirect Sales Channel Unit (focused on attracting customers through sellers or retailers with a potentially high volume distribution network) and the Commercial Planning for Telephone Banking Unit (focused on attracting customers and cross-selling through internal and external call centers). During the year, the new division attracted 33% of the Bank’s new customers.

Additionally, the first collections and payments center was created to handle large cash volume transactions, creating a safe and dynamic environment both for customers and employees. During 2015, the Bank plans to continue to open more of these centers.

Consumption

Through its Regional Credit Card Companies and CFA, Banco Galicia offers financing for low- and mid-income consumer segments.

Regional Credit Card Companies

The companies devoted to the issuance of regional credit cards and the provision of financing transactions to consumers are subsidiaries of Banco Galicia through Tarjetas Regionales (Tarjeta Naranja and Tarjetas Cuyanas).

Through the Regional Credit Card Companies, Tarjetas Regionales is the largest non-bank credit card issuer in Argentina and one of the largest in Latin America, in each case, based on the number of credit cards issued. It is also one of the two largest merchant acquirers in Argentina and one of the largest credit card processors in Argentina. As of December 31, 2014, Tarjetas Regionales had more than 3 million active accounts, 8.6 million issued credit cards and more than 230,000 affiliated merchants. As of the same date, Tarjetas Regionales estimated that its market share of issued credit cards in Argentina was approximately 19% and of active accounts in Argentina was approximately 20%. As the credit card processor for all of its credit card operations, Tarjetas Regionales processes approximately 152 million transactions per year.

Tarjetas Regionales has a distinctive business model that it believes is well-suited to developing economies in Latin America and to the cultural background of its clients. Its business model of credit card issuance and related credit services focuses on the specific needs of lower- and lower-middle-income clients through personalized and attentive services using its extensive network of branches. Tarjetas Regionales’ client base is primarily in the Interior, where each of its brands has a leading presence in its coverage area. Its current expansion efforts in Argentina are focused on the Greater Buenos Aires.

 

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In addition, through the Regional Credit Card subsidiaries, Tarjetas Regionales issues, operates and processes its own branded credit cards, the Tarjeta Naranja credit card and the Tarjeta Nevada credit card, which allow credit card holders to charge purchases of goods and services in the network of merchants that have agreed to accept these proprietary credit cards. As of December 31, 2014, these proprietary credit cards accounted for, on average, approximately 52% of its issued credit cards and approximately 75% in terms of its average monthly purchase volumes. Tarjetas Regionales also offers its clients international credit card brands such as Visa, MasterCard and American Express that are issued by Banco Galicia on its behalf. In addition to its credit card business, Tarjetas Regionales also extends personal loans, through the Regional Credit Card Companies, to its clients either for the account of the Regional Credit Card Companies or for the account of Banco Galicia at the election of the relevant Regional Credit Card Company. Tarjetas Regionales provides its products and services through an extensive network of 262 branches, client service centers and other points of sale strategically located in most major Argentine cities. Its branch network provides a critical service and payment interface for its clients, which allows it to provide targeted client service and form relationships with its clients and affiliated merchants.

For a breakdown of the Regional Credit Card Companies’ revenues for the last three financial years, see Item 5.A. “Operating Results-Results by Segments-Regional Credit Cards”.

Compañía Financiera Argentina

CFA is the leading financial company in Argentina in the personal loan business. As of December 31, 2014, CFA’s assets were over Ps.3,731 million and its shareholders’ equity was Ps.1,164 million. CFA employed 1,109 people. With 59 branches and 36 points of sale throughout Argentina, CFA offers its products to 442,322 customers, who belong, in general, to the low-to-medium income segments, characterized by limited interaction with traditional banks. Such customers often seek a more simplified and quick processing regime for their loans and other banking products.

Main products:

 

    Efectivo Sí - Loans

 

    Personal Loans: Unsecured personal loans payable in installments.

 

    Consumer Loans: Product to finance purchases of goods through merchants associated with CFA, without using any cash or credit cards. Such goods include home appliances, household goods and construction materials.

 

    Payroll Loans: Granted to affiliates or associate members of mutuals, cooperatives, unions, and to companies’ employees.

 

    Loans to Public Sector Employees: Loans targeted to public sector employees on the national level, which are deducted directly from their salary.

 

    Efectivo Sí - Savings

 

    Time Deposits: An investment alternative which allows customers to receive returns over its invested money in a quick and streamlined manner.

 

    Savings Account and Debit Card: Mainly aimed at retired individuals who receive their salaries through Efectivo Sí.

 

    Efectivo Sí - Cards

 

    Credit Cards: CFA is the issuer of Visa and MasterCard, both at domestic and international level.

 

    Efectivo Sí - Insurance

 

    Insurance: CFA sells different types of insurance policies from leading companies of the market to meet customers’ needs.

 

    Retirement and pension payment - National Social Security Administration: Aimed at retired individuals and pensioners collecting their payments at CFA.

 

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Throughout the year, the Efectivo Sí trademark continued to be strengthened, mainly through advertising in major soccer tournaments organized by the Argentine Soccer Association.

CFA’s net income for fiscal year 2014 amounted to Ps.113 million (including the results of Cobranzas y Servicios in accordance with its 5% equity interest). At year end, its loan portfolio, net of allowances for loan losses, exceeded Ps.2.726 million, representing a 10% decrease as compared to fiscal year 2013 and had strong portfolio quality ratios.

CFA’s objective is to secure, maintain and expand its leading position in the consumer finance market. During 2015, CFA expects to further grow and consolidate its customer portfolio and boost credit card circulation. With respect to financing, it will seek financing from the domestic capital market by issuing trusts and notes, and it will focus on increasing financing through time deposits at its branches.

For a breakdown of CFA’s revenues for the last financial year, see Item 5.A. “Operating Results-Results by Segments-CFA”.

Financial Division

The Financial Division of Banco Galicia includes the Financial Operations, Banking Relations, Assets and Liabilities Management and Information Management and Support areas. The Financial Division is also involved in mutual funds and in brokerage services through Galicia Valores.

The Financial Operations Division is responsible for, among other things, managing liquidity and the different financial risks of Banco Galicia, based on the parameters determined by the board of directors of Banco Galicia. It manages positions in foreign currency and government securities, and it also acts as an intermediary and distributes financial instruments for its own customers (institutional investors) and corporate customers and individuals. It participates in different markets in its capacity as an agent in respect of the Mercado Abierto Electrónico (“MAE”) and as a member of the Rosario Futures Exchange (“ROFEX”), Financial Products Division. Through Galicia Valores, this division offers customers the ability to buy and sell securities on the BASE.

Within the framework of the Capital Markets Law, the Bank was authorized by the CNV to act as a settlement and clearing agent and trading agent- comprehensive, and was added as member of the Buenos Aires Stock Market (the “MERVAL”).

During the year, the Bank adjusted its internal processes and IT systems to the regulatory requirements of the above-mentioned law, and the CNV’s regulations.

In 2014, the volume traded in the foreign exchange market decreased as a result of foreign exchange restrictions. In the wholesale market, the total volume traded among banks in the MAE decreased by 14%, as compared to 2013, from US$58,200 million in 2013 to US$49,900 million in 2014, whereas the volume traded by the Bank decreased by 18%, from US$5,050 million in 2013 to US$4,143 million in 2014, maintaining third position ranking according to the MAE.

Regarding the futures market, Banco Galicia’s position in the MAE’s ranking decreased from third to fourth place, and the Bank was ranked second in ROFEX. In both markets, Banco Galicia traded a total volume of US$7,026 million, 37% less than the US$11,110 million traded in 2013. The foreign trade volume transacted amounted to US$12,600 million, 25% lower than that in 2013. In addition, dollar trading transactions significantly increased as a result of loosening foreign exchange restrictions, from US$74 million in 2013 to US$600 million in 2014.

The total volume traded in fixed income through the MAE evidenced a 14% increase, from US$107,219 million in 2013 to US$122,440 million in 2014. Banco Galicia climbed to the first place in the annual ranking according to the MAE, with an 18% increase, as compared to the previous year, reaching US$16,320 million traded and a 13% market share.

 

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The Banking Relations Division is responsible internationally for managing Banco Galicia’s business relationships with correspondent banks, international credit agencies, official credit agencies and, domestically, with financial institutions and exchange houses.

The Assets and Liabilities Management Division is in charge of preparing and analyzing information aimed at managing the mismatches inherent in banking activities, maintaining the exposure within the policies determined by Banco Galicia’s board of directors.

The Bank’s activities include the provision of support to the Assets and Liabilities Committee through the analysis and quantification of the risks associated with different business strategies and market scenarios, as well as the follow-up of liquidity policies and currency mismatches, whether due to regulations of the Argentine Central Bank or other Banco Galicia operations, and the assessment of the Bank’s funding unit results of operations through a transfer pricing method so as to assess the profitability of each business unit, isolated from the rate, term and currency risk exposure.

Insurance

Galicia Seguros is a provider of a variety of property and casualty and life insurance products. Its most important line of business is group life insurance, including employee benefit plans and credit related insurance. With regard to property and casualty insurance products, it primarily underwrites home and ATM theft insurance. Galicia Retiro provides annuity products, and Galicia Broker is an insurance broker. In the 2012 fiscal year, Galicia Seguros, together with three other insurance companies, created Nova Re Compañía Argentina de Reaseguros S.A., which aims to increase the reinsurance offers in the Argentinean market. These companies operations are all located in Argentina.

Total insurance production of the aforementioned insurance companies amounted to Ps.1,762 million during 2014, 33% higher than the volume of premiums of the previous year (Ps.1,322 million).

This increase in insurance production was recorded mainly for Galicia Seguros, with Ps.440 million more premiums written than in the same period of the previous fiscal year. As regards Galicia Seguros’ business transactions, the focus was placed on continuing to increase the company’s turnover and sales, which in 2014 amounted to Ps.510 million of annualized premiums. This represented a 29% growth as compared to the previous year, thus increasing the insurance policy lapse ratio and extending the types of coverage offered by adding insurance policies in new lines of business, including liability insurance and burial insurance.

Law No. 26,425 that created the Argentine Social Security Integrated System (Sistema Integrado Previsional Argentino) brought an end to pension-linked life annuities, the main product marketed by Galicia Retiro. Consequently, the company’s main objective is to efficiently administrate current business and to analyze whether or not to re-launch new voluntary individual and group retirement products.

Within the current economic framework, measures aimed at complying with the goals established in the Business Plan will continue during 2015.

Other Businesses

Galicia Administradora de Fondos: This is the company that manages the FIMA family mutual funds that are distributed by Banco Galicia through its various channels (network of branches, home banking and investment centers, among others). The company’s team is comprised of asset management professionals the goal of whom is to manage the FIMA family funds and to meet the demands of the individuals, companies and institutions it serves.

During fiscal year 2014, the market volume for mutual funds increased 82%, primarily due to bond funds, amounting to Ps.132,328 million as of the end of 2014. The total assets of the FIMA family mutual funds increased 79% from the previous fiscal year, reaching, as of December 31, 2014, a volume of Ps.11,885 million, representing a market share of 9%.

 

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The outlook for fiscal year 2015 foresees a continued growth of mutual funds and a development of business activity in the framework of the new Capital Markets Law, such as the provision of investment advice and management services.

Net Investment: this company has performed its activities in the areas of intercompany e-commerce, with the purpose of creating and exchanging synergies with Banco Galicia’s business activities.

During the 2011 fiscal year, the shareholders of Net Investment decided to amend the corporate purpose in order to be able to invest in additional companies in related, accessory and/or supplementary activities.

For fiscal year 2015, the board of directors of Net Investment is analyzing business alternatives and opportunities.

Galicia Warrants: this company is a leading company in the deposit certificates and warrants issuance market. It has been conducting transactions since 1994, supporting medium and large companies with respect to stock custody. Galicia Warrants’ main objective is to enable its customers to access credit and financing secured by the property kept under custody. Galicia Warrants’ main customers belong to the agricultural, industrial and agro-industrial sectors, as well as exporters and retailers. In fiscal year 2014, Galicia Warrants recorded an income from services of Ps.43 million and a net income of Ps.13 million.

For a breakdown of the other businesses’ revenues for the last three financial years, see Item 5.A. “Operating Results-Results by Segments-Other Grupo Businesses.”

Competition

Due to our financial holding structure, competition is experienced at the level of our operating subsidiaries. We face strong competition in most of the areas in which our subsidiaries are active. For a breakdown of our total revenues, for each of the past three fiscal years, for the activities discussed below (i.e., banking, regional credit cards, CFA personal loans and insurance), see Item 5.A. “Operating Results-Results by Segments.”

Banking

Banco Galicia faces significant competition in all of its principal areas of operation from foreign banks operating in Argentina, mainly large retail banks which are subsidiaries or branches of banks with global operations; Argentine national and provincial government-owned banks; private-sector domestic banks and cooperative banks, as well as non-bank financial institutions.

With respect to private-sector customers, Banco Galicia’s main competitors are large foreign banks and certain domestically-owned private-sector banks. Banco Galicia also faces competition from government-owned banks.

Banco Galicia’s estimated market share of private-sector deposits in the Argentine financial system was 8.79% as of December 31, 2014, as compared to 9.20% as of December 31, 2013 and 9.11% as of December 31, 2012.

With respect to loans to the private sector, Banco Galicia’s Argentine market share was 8.78% as of December 31, 2014, as compared to 8.78% and 9.03% as of December 31, 2013 and December 31, 2012, respectively.

According to the information published by the Argentine Central Bank, as of December 31, 2014, Banco Galicia was the second largest private-sector bank as measured by its assets, its deposits and its loan portfolio and ranked fourth in terms of net worth.

Banco Galicia believes that it has a strong competitive position in retail banking, both with respect to individuals and small and medium-sized companies. Specifically, Banco Galicia believes it is one of the primary providers of financial services to individuals, the primary private-sector institution serving the small and medium-sized companies sector, and has traditionally maintained a leading position in the agriculture and livestock sector.

 

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Argentine Banking System

As of December 31, 2014, the Argentine financial system consisted of 81 financial institutions, of which 65 were banks and 16 were financial non-bank institutions (including finance companies, credit unions and savings and loans associations). Of the 65 banks, 12 were Argentine national and provincial government-owned or related banks. Of the 53 private-sector banks, 33 were private-sector domestically-owned banks and 20 were foreign-owned banks (i.e., local branches or subsidiaries of foreign banks).

As of the same date, the largest private-sector banks, in terms of total deposits, were: Banco Santander Río, Banco Galicia, BBVA Banco Francés, Banco Macro, Credicoop, HSBC Bank and Patagonia. Banco Galicia, Banco Macro and Credicoop are domestically-owned banks and the others are foreign-owned banks. According to information published by the Argentine Central Bank as of December 31, 2014, private-sector banks accounted for 52.1% of total deposits and 60.4% of total net loans in the Argentine financial system. As of December 31, 2014, financial institutions (other than banks) accounted for approximately 0.4% of deposits and 2.5% of net loans in the Argentine financial system.

As of December 31, 2014, the largest Argentine national and provincial government-owned or related banks, in terms of total deposits, were Banco Nación and Banco de la Provincia de Buenos Aires. Under the provisions the Financial Institutions’ Law, public-sector banks have comparable rights and obligations to private banks, except that public-sector banks are usually chosen as depositaries for public-sector revenues and promote regional development and certain public-sector banks have preferential tax treatment. The bylaws of some public-sector banks provide that the governments that own them (both national and provincial governments) must guarantee their commitments. According to information published by the Argentine Central Bank, as of December 31, 2014, government-owned banks and banks in which the national, provincial and municipal governments had an ownership interest accounted for 47.6% of deposits and 37.1% of loans in the Argentine financial system.

Consolidation has been a dominant theme in the Argentine banking sector since the 1990’s, with the total number of financial institutions declining from 214 in 1991 to 81 as of December 31, 2014, with the ten largest banks holding 76% of the system’s deposits from the private sector and 70% of the system’s loans to the private sector as of December 31, 2014.

Foreign banks continue to have a significant presence in Argentina, despite the fact that the number of foreign banks decreased by 19 through December 2014, as compared to the end of 2001, and that foreign banks’ share of total deposits has decreased since the 2001-2002 crisis while the share of domestic private-sector banks has increased.

Starting in fiscal year 2013 and continuing through fiscal year 2014, the Argentine Central Bank took a more active role in the management of financial institutions’ business, by means of the establishment of new regulations, such as: the establishment of guidelines for granting credit through the “Credit Line for Productive Investment” (established to finance investment projects and working capital for specific purposes and having certain characteristics), the establishment of caps on interest rates on personal loans, pledge loans and credit card loans, as well as the creation of the requirement to obtain an authorization to increase fees. In addition, it established minimum interest rates on time deposits for individuals.

Regional Credit Cards

In the consumer loan market, the Regional Credit Card Companies compete with Argentine banks and other financial institutions that target similar economic segments. The main players in this segment include Banco Supervielle, Banco Columbia, Banco Comafi, Banco Credicoop, Banco MasVentas, Banco Municipal de Rosario and CFA. Historically, certain international banks with presence in Argentina have attempted to target consumers in these economic segments and have been, to date and for the most part, unsuccessful.

In order to compete effectively at a national and regional basis, the Regional Credit Card Companies target low- to middle-income clients by offering personalized services in each region, focusing their commercial efforts mainly on medium- and low-income segments. While other Argentine credit card issuers and consumer loan providers focus on earning interest on outstanding personal loans and credit card balances, they also focus on and have access to additional sources of revenues including merchant fees and commissions, which allow them to offer

 

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competitive pricing and financing terms. Furthermore, unlike other credit card issuers in Argentina, approximately 60% of their clients pay their credit card bill through their branch network. The broad geographical reach of their distribution network, which is the second largest in Argentina, has allowed the Regional Credit Card Companies to establish a local presence in all the provinces of Argentina.

The Regional Credit Card Companies believe that their diversified and consistent funding sources, significant network of branches, robust information technology infrastructure, relationships with over 230,000 merchants and the brand recognition they enjoy provide them with a competitive edge to consolidate and expand their market share in their target market segment, making it difficult for new players to effectively compete in this market segment on a national scale.

Compañía Financiera Argentina

CFA markets all of its financial products mainly to medium- and low-income segments. CFA’s main competitors are: Banco Cetelem, Banco Columbia, Banco de Servicios y Transacciones, Cooperativa la Capital del Plata, Caja de Crédito Cuenca, Banco de Servicios Financieros, Banco Supervielle and Banco Sáenz (Frávega Group).

CFA also faces competition with certain entities which render non-regulated services, or small chains, located in less populated cities. Some big chains of retailers also offer their own financing, such as Garbarino, Frávega, Megatone and Riveiro, financed through the issuance of financial trusts.

Insurance

Sudamericana’s subsidiaries face significant competition since, as of December 2014, the Argentine insurance industry was comprised of approximately 184 insurance companies, 36 of which were dedicated exclusively to life insurance and 16 to annuities. Subsidiaries of foreign insurance companies and the world’s largest insurance companies with global operations are among these companies. In addition, as of that date, the number of brokers amounted to approximately 26,000 individuals and 550 companies.

During 2014, the insurance industry continued growing. Production amounted to Ps.109 billion, 28% higher than the level recorded for the period before.

Out of the total insurance production, 80% relates to property insurance, 18% relates to life and personal insurance, and 2% relates to retirement insurance.

Within the 80% corresponding to property insurance, the automotive insurance segment continues to be the most significant segment, representing 45%, followed by the workers’ compensation segment, representing 32%.

Within the life insurance segment, the group life insurance segment is the most significant, representing 68%, followed by individual life insurance, representing 14%, and personal accident insurance, representing 14%.

As of June 2014, based on internal studies undertaken by Galicia Seguros it is estimated that Galicia Seguros ranked fifth in terms of net premiums for life insurance policies underwritten, first in terms of net premiums for home insurance policies underwritten and first in terms of net premiums for theft insurance policies underwritten.

Sales and Marketing

Banco Galicia’s, the Regional Credit Card Companies’ and CFA’s distribution capabilities are our principal marketing channels. Our distribution network is one of the largest and most flexible distribution platforms in the country and has nationwide coverage. The network of offices of the Regional Credit Card Companies, located in the Interior, mainly serves the medium and low income segments of the population, who tend to use fewer banking and financial services. CFA’s network serves the low income segment of the population, mainly in Buenos Aires and its

 

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outskirts. Through Banco Galicia, we operate a nationwide distribution network, which is one of the most extensive and diversified distribution networks among private-sector financial institutions in Argentina.

 

     December 2014  

Branches (number)

  

Bank Branches

     261   

Regional Credit Card Cos. Branches

     207   

CFA Branches

     59   

Business Centers and In-House Facilities

     35   

Eminent’s space with Private-Banking

     17   
  

 

 

 

Electronic Banking Terminals (number)

ATMs

  853   

Self-Service Terminals

  831   
  

 

 

 

Electronic Banking Transactions (thousands per month)

ATMs + Self-Service Terminals

  10,465   

Phone-Banking

  574   

e-banking

  38,447   

Banco Galicia markets all of its financial products and services to high-, medium- and medium- to low-income individuals, including loans, insurance and FIMA family of mutual funds, among others, through its branch network, which operates on-line in real time. Within the branches, the sales force is specialized by type of customer and by customer segment. Banco Galicia’s sales policy encourages tellers to perform sales functions as well. Wealthy individuals who are private banking customers are served by specialized officers and a specialized network of service centers, including a head office facility.

Commercial and investment banking services to large corporations and other entities are provided in a centralized manner. Branch officers are responsible for Banco Galicia’s relationship with middle-market and small businesses and most of the agriculture and livestock sector customers. Banco Galicia also has established specialized centers that concentrate on providing service to businesses, which are distributed across the country and located in main cities of the Interior and certain customer companies’ facilities.

All of Banco Galicia’s individual and corporate customers have access to Banco Galicia’s electronic distribution channels, including the ATM and self-service terminals network, a multifunction call center, an e-banking website (www.bancogalicia.com) and a mobile banking service platform Galicia Móvil.

Banco Galicia is the leading Argentine bank in terms of relevance on social networks. Customers find social networks a means to talk to Banco Galicia quickly, effectively and frankly. Banco Galicia consistently focuses on adapting to the varying situations that result from the use of social media, using these opportunities as a chance to improve its relationship with its customers. Through its work on the digital platform, Banco Galicia has established an excellent reputation regarding its online services, providing not only traditional services, but also involving the use of social networks, cellular phones and transactional, informative and communicative services, with the purpose of promoting the Bank’s business and establishing effective channels of communication with its current and potential customers. Banco Galicia is client service oriented and assigns great importance to its service model and seeks to improve it constantly.

Banco Galicia has a segmented marketing approach and designs marketing campaigns focused on specific segments of Banco Galicia’s customer base. Banco Galicia’s marketing strategy is also focused on the development of long-term relationships with customers based on a deep and increasing knowledge of those customers. As part of this client-oriented strategy, Banco Galicia implemented a customer relationship management technology.

Banco Galicia considers quality of service as the main element capable of distinguishing it from competitors. In order to measure this indicator, Banco Galicia periodically performs surveys, with positive results in recent years, showing high customer satisfaction.

The Regional Credit Card Companies market their products and services through a network of branches and service centers, the size of which depends on the size of the locations in which they operate. The companies’ culture is strongly client service oriented and assigns great importance to quality of service. Sales officials receive intensive training in personalized sale of the companies’ products and quality of service, given that the bulk of sales is conducted on a one-on-one basis. Quality of service at the branches is permanently monitored by third parties and

 

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availability is enhanced through extended business hours. Each of the companies has a web site through which they conduct sales, receive customers’ requests (such as requests for statements, loans or increases in the credit limits assigned and new cards, among others), provide information on and promote products. These sites include a link that allows payments to be made. In addition, Tarjeta Naranja has the website www.tiendanaranja.com aimed at selling products associated with its primary merchants. Similarly, Tarjetas Cuyanas has the website www.preciosbajos.com. Each company has a call center, through which sales, post-sales and collection functions are performed.

CFA markets its products through a network of 59 branches and 36 points of sales, located throughout Argentina. The company leads the personal loan business among financial institutions in Argentina and offers its products to customers who belong, in general, to the low-to-medium income segments, characterized by limited interaction with traditional banks. As such, CFA offers its product “Efectivo Si Consumer Loans” in approximately 340 active merchants, while the agreements are offered out of the branches through different channels. Such customers often seek a more simplified and quick processing regime for their loans and other banking products.

To market its products, Sudamericana’s subsidiaries mainly use Banco Galicia’s, the Regional Credit Card Companies’ and CFA’s distribution networks. They also use the sales officers of Galicia Broker. In addition Sudamericana has a telemarketing center of its own.

Property

The following are our main property assets, as of December 31, 2014:

 

Property

  

Address

   Square
Meters
(approx.)
    

Main Uses

Grupo Financiero Galicia

  

  

- Rented

   -Tte. Gral. Juan D. Perón 430, 25th floor, Buenos Aires, Argentina      89       Administrative activities

Banco de Galicia y Buenos Aires S.A.

     

- Owned

   -Tte. Gral. Juan D. Perón 407, Buenos Aires, Argentina      18.046       Administrative activities
   -Tte. Gral. Juan D. Perón 430, Buenos Aires, Argentina      41.407       Administrative activities
   -Florida 361, Buenos Aires, Argentina      9.210       Administrative activities
   -Corrientes 6287, Buenos Aires, Argentina      4,800       Land for corporate building

- Rented

   -San Martín 178/200, Buenos Aires, Argentina      3.777       Administrative activities
   -Corrientes 411, 3rd and 4th floors, Buenos Aires, Argentina      3.276       Administrative activities

Banco Galicia Uruguay S.A. (in liquidation)

     

- Rented

   -Bernardina Fragoso de Rivera 1438, Montevideo, Uruguay      580       Storage
   - Dr. Luis A. de Herrera 1052 - Tower C , Unit 1309, Montevideo, Uruguay      87       Administrative activities

Tarjeta Naranja S.A.

     

- Owned

   -Sucre 152, 154 and 541, Córdoba, Argentina      6,300       Administrative activities
   -Humberto Primo, Córdoba, Argentina      4,900       Administrative activities
   -Jujuy 542, Córdoba, Argentina      853       Administrative activities
   -Ruta Nacional 36, km. 8, Córdoba, Argentina      49,200       Storage
   -Río Grande, Tierra del Fuego, Argentina      309       Administrative activities
   -San Jerónimo 2348 and 2350, Santa Fe, Argentina      1,475       Administrative activities

- Rented

   -Sucre 145/151, La Rioja 359, 364 and 375, Córdoba, Argentina      4,450       Administrative activities and printing center
   -Av. Colón 377, Córdoba, Argentina      300       Administrative activities
   Av. Corrientes 3135, CABA, Argentina      1,124       Administrative activities

Tarjetas Cuyanas S.A.

     

- Rented

   -Belgrano 1415, Mendoza, Argentina      1,160       Administrative activities
   -Belgrano 1462 Anexo II y III, Mendoza, Argentina      474       Administrative activities and printing center Administrative activities
   -Belgrano 1478 Anexo I Casa Matriz, Mendoza, Argentina      1,156       Administrative activities
   -Olascoaga 348, San José, Guaymallén, Mendoza, Argentina      580       Storage

Compañía Financiera Argentina

     

- Rented

   -Paseo Colón 746, 3rd floor, Buenos Aires, Argentina      9,275       Administrative Activities

Galicia Warrants S.A.

     

- Owned

   -Tte. Gral. Juan D. Perón 456, 6th floor, Buenos Aires, Argentina      118       Administrative activities
   -Alsina 3396/3510, San Miguel de Tucumán, Tucumán, Argentina      12,800       Storage

- Rented

   -Alto Verde, Chicligasta, Tucumán, Argentina      2,000       Storage
   -Santa Marta, Alderete, Tucumán, Argentina      2,100       Storage

Galicia Seguros S.A.

     

- Owned

   -Maipú 241, Buenos Aires, Argentina      3,261       Administrative activities

 

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As of December 31, 2014, our distribution network consisted of:

 

    Banco Galicia: 261 branches located in Argentina, 139 of which were owned and 122 of which were rented by Banco Galicia, located in all of Argentina’s 23 provinces.

 

    Tarjeta Naranja: 214 sales points located in 21 of the 23 Argentine provinces, 163 of which were rented by the company.

 

    Tarjetas Cuyanas: 48 sales points in the provinces of Mendoza, San Juan, San Luis, Santiago del Estero, La Pampa, La Rioja, Catamarca, Neuquén, Rio Negro, Salta, Jujuy and Tucumán, all of which were leased.

 

    CFA: 41 branches, 38 mini-branches and 16 payment centers, all of which were leased and with at least one branch located in each of Argentina’s provinces.

Capital Investments and Divestitures

During 2014, our capital expenditures amounted to Ps.1,170 million, distributed as follows:

 

    Ps.475 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and

 

    Ps.695 million in organizational and IT system development expenses.

During 2013, our capital expenditures amounted to Ps.990 million, distributed as follows:

 

    Ps.344 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and

 

    Ps.646 million in organizational and IT system development expenses.

During 2012, our capital expenditures amounted to Ps.868 million, distributed as follows:

 

    Ps.300 million in fixed assets (real estate, machinery and equipment, vehicles, furniture and fittings); and

 

    Ps.568 million in organizational and IT system development expenses.

These capital expenditures were made mainly in Argentina.

In February 2012, Tarjetas Regionales carried out a capital increase that was mainly subscribed for by the minority shareholders of its subsidiaries, Tarjeta Naranja and Tarjeta Cuyanas, and which was predominantly funded by the contribution of such minority shareholders’ holdings in such subsidiaries. The Bank’s direct and indirect interest in Tarjetas Regionales amounted to 77% of the capital stock with the remaining 23% of the capital stock held by the minority shareholders who became shareholders in Tarjetas Regionales. As a result of this transaction, Tarjetas Regionales’ direct and indirect interest in Tarjeta Naranja and Tarjetas Cuyanas amounts to 100% of the capital stock of such subsidiaries.

During the 2012 fiscal year, Galicia Seguros invested Ps.12 million for the formation of a reinsurance company (Nova Re Compañía Argentina de Reaseguro S.A.), controlling 39% of the capital stock and voting rights of such company.

In October 2013, Galicia Seguros approved the sale of its 4% ownership interest in Nova Re to Patria Re, a Mexican reassurance company. This transaction is subject to the corresponding authorization of the National Insurance Superintendency and once it is approved Galicia Seguros will continue to own 35% of Nova Re.

As a result of a number of acquisitions of shares in the market, since December 16, 2013, Grupo Financiero Galicia increased its ownership of outstanding shares in and voting rights for its subsidiary Banco Galicia to 95%, reaching a position of nearly total control according to Argentine regulations. On December 19, 2013, Grupo Financiero Galicia announced that it had finalized the merger of Lagarcué S.A. and Theseus S.A. into Grupo Financiero Galicia, further increasing its ownership interest in Banco Galicia by 4.5% (which was previously owned by Lagarcué S.A. and Theseus S.A). As a result of the foregoing transactions, as of the year ended December 31, 2013, Grupo Financiero Galicia controlled 99.6% of the capital stock of Banco Galicia.

 

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On February 25, 2014, Grupo Financiero Galicia resolved to issue an offer to acquire the 2,123,962 shares of Banco Galicia owned by third parties at a price of Ps.23.22 per share. On April 24, 2014, said transaction was approved by the CNV and on July 14, 2014, it was incorporated by the Argentine Superintendency of Corporations. On August 4, 2014, the above approval in respect of such acquisition was made part of the public record, and, as a consequence of this acquisition, Grupo Financiero Galicia currently owns 100% of the shares of the Bank.

On April 15, 2014, Banco Galicia sold its interest in Galicia Administradora de Fondos to Grupo Financiero Galicia, for Ps.39 million.

During May 2014, the shareholders of Tarjetas del Mar approved a capital increase of Ps.32 million, which was fully subscribed for by Sociedad Anónima Importadora y Exportadora de la Patagonia. As a result, the Bank has a 58.8% equity interest in Tarjetas del Mar, while Compañía Financiera Argentina holds a 1.2% and Sociedad Anónima Importadora y Exportadora de la Patagonia holds the remaining 40%.

During the third quarter of fiscal year 2014, the Bank transferred to Visa Argentina S.A. its equity investment in Banelco S.A., for Ps.40 million.

On October 14, 2014, Tarjeta Naranja executed the final agreement to sell its equity interest in Tarjeta Naranja Perú, equivalent to 24% of the capital stock, to Grupo Crédito S.A. for US$900,000. As of the date of this annual report, the shares have been sold.

Investment planning

We have budgeted capital expenditures for the fiscal year ending December 31, 2015, for the following purposes and amounts:

 

     (In millions of Pesos)  

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

   Ps. 890   

Organizational and IT System Development

     887   
  

 

 

 

Total

Ps. 1,777   
  

 

 

 

These capital expenditures will be made mainly in Argentina.

Management considers that internal funds will be sufficient to finance fiscal year ended December 31, 2015 capital expenditures.

Selected Statistical Information

You should read this information in conjunction with the other information provided in this annual report, including our audited consolidated financial statements and Item 5. “Operating and Financial Review and Prospects”. We prepared this information from our financial records, which are maintained under accounting methods established by the Argentine Central Bank under Argentine Banking GAAP, and do not reflect adjustments necessary to reflect the information in accordance with U.S. GAAP.

The exchange rate used in translating Pesos into Dollars, which is used in calculating the convenience translations included in the following tables is the Reference Exchange Rate published by the Argentine Central Bank, which was Ps.8.5520, Ps.6.5180 and Ps.4.9173 per US$1.00 as of December 31, 2014, December 31, 2013 and December 31, 2012, respectively. The exchange rate translations contained in this annual report should not be construed as representations that the stated Peso amounts actually represent or have been or could be converted into Dollars at the rates indicated or any other rate. See Item 3. “Key Information-Exchange Rate Information”.

 

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Average Balance Sheet and Income from Interest-Earning Assets and Expenses from Interest-Bearing Liabilities

The average balances of interest-earning assets and interest-bearing liabilities, including the related interest that is receivable and payable, are calculated on a daily basis for Banco Galicia, Galicia Uruguay, Tarjetas Regionales and CFA on a consolidated basis. The average balances of interest-earning assets and interest bearing liabilities are calculated on a monthly basis for Grupo Financiero Galicia and its other non-banking subsidiaries.

Average balances have been separated between those denominated in Pesos and those denominated in Dollars. The average yield/rate is the amount of interest earned or paid during the period divided by the related average balance.

Net gains/losses on government securities and related differences in quoted market prices are included in interest earned. We manage our trading activities in government securities as an integral part of our business. We do not distinguish between interest income and market gains or losses on our government securities portfolio. The non-accrual loans balance is included in the average loan balance calculation.

The following table shows our consolidated average balances, accrued interest and nominal interest rates for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2014.

 

     Fiscal Year Ended December 31, 2014 (*)  
     Pesos      Dollars     Total  
     Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
     Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
    Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
 
     (in millions of Pesos, except rates)  

Assets

                      

Government Securities

     7,561        1,814         23.99         1,199        40         3.34        8,760        1,854         21.16   

Loans

                      

Private Sector

     55,704        16,072         28.85         3,368        164         4.87        59,072        16,236         27.49   

Public Sector

     —          —           —           —          —           —          —          —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Loans (1)

  55,704      16,072      28.85      3,368      164      4.87      59,072      16,236      27.49   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Other

  2,400      664      27.67      117      4      3.42      2,517      668      26.54   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Earning Assets

  65,665      18,550      28.25      4,684      208      4.44      70,349      18,758      26.66   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Gold

  7,838      —        —        6,499      —        —        14,337      —        —     

Equity in Other Companies

  2,123      —        —        534      —        —        2,657      —        —     

Other Assets

  7,451      —        —        325      —        —        7,776      —        —     

Allowances

  (2,550   —        —        (59   —        —        (2,609   —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Assets

  80,527      —        —        11,983      —        —        92,510      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities and Equity

Deposits

Checking Accounts

  —        —        —        1      —        —        1      —        —     

Savings Accounts

  8,722      20      0.23      1,464      —        —        10,186      20      0.20   

Time Deposits

  28,418      6,555      23.07      1,811      35      1.93      30,229      6,590      21.80   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Bearing Deposits

  37,140      6,575      17.70      3,276      35      1.07      40,416      6,610      16.35   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Debt Securities

  3,110      811      26.08      5,866      674      11.49      8,976      1,485      16.54   

Other

  1,492      477      31.97      1,197      39      3.26      2,689      516      19.19   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Bearing Liabilities

  41,742      7,863      18.84      10,339      748      7.23      52,081      8,611      16.53   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Demand Deposits

  14,432      —        —        686      —        —        15,118      —        —     

Other Liabilities

  14,789      —        —        1,350      —        —        16,139      —        —     

Minority Interests

  629      —        —        —        —        —        629      —        —     

Shareholders’ Equity

  8,543      —        —        —        —        —        8,543      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Liabilities and Equity

  80,135      —        —        12,375      —        —        92,510      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Spread and Net Yield

Interest Rate Spread

  9.41      (2.79   10.13   

Cost of Funds Supporting Interest-Earning Assets

  11.97      15.97      12.24   

Net Yield on Interest-Earning Assets

  16.28      (11.53   14.42   

 

(*) Rates include the CER adjustment.
(1) Non accruing loans have been included in average loans.

 

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The following table shows our consolidated average balances, accrued interest and nominal interest rates for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2013.

 

     Fiscal Year Ended December 31, 2013 (*)  
     Pesos      Dollars     Total  
     Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
     Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
    Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
 
     (in millions of Pesos, except rates)  

Assets

                      

Government Securities

     3,755        568         15.13         401        27         6.80        4,156        595         14.33   

Loans

                      

Private Sector

     44,965        11,368         25.28         2,940        138         4.69        47,905        11,506         24.02   

Public Sector

     7        —           —           —          —           —          7        —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Loans (1)

  44,972      11,368      25.28      2,940      138      4.69      47,912      11,506      24.01   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Other

  2,009      364      18.14      83      7      8.78      2,092      371      17.77   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Earning Assets

  50,736      12,300      24.24      3,424      172      5.04      54,160      12,472      23.03   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Gold

  6,344      —        —        3,467      —        —        9,811      —        —     

Equity in Other Companies

  1,446      —        —        263      —        —        1,709      —        —     

Other Assets

  5,671      —        —        625      —        —        6,296      —        —     

Allowances

  (2,059   —        —        (73   —        —        (2,132   —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Assets

  62,138      —        —        7,706      —        —        69,844      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities and Equity

Deposits

Checking Accounts

  —        —        —        1      —        —        1      —        —     

Savings Accounts

  7,140      15      0.20      938      —        —        8,078      15      0.18   

Time Deposits

  21,782      3,755      17.24      1,475      17      1.15      23,257      3,772      16.22   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Bearing Deposits

  28,922      3,770      13.04      2,414      17      0.70      31,336      3,787      12.09   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Debt Securities

  2,153      430      19.96      4,198      440      10.48      6,351      870      13.70   

Other

  1,426      332      23.28      666      23      3.45      2,092      355      16.97   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Bearing Liabilities

  32,501      4,532      13.94      7,278      480      6.60      39,779      5,012      12.60   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Demand Deposits

  11,264      —        —        464      —        —        11,728      —        —     

Other Liabilities

  10,895      —        —        1,113      —        —        12,008      —        —     

Minority Interests

  711      —        —        —        —        —        711      —        —     

Shareholders’ Equity

  5,618      —        —        —        —        —        5,618      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Liabilities and Equity

  60,989      —        —        8,855      —        —        69,844      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Spread and Net Yield

Interest Rate Spread

  10.30      (1.56   10.43   

Cost of Funds Supporting Interest-Earning Assets

  8.93      14.02      9.25   

Net Yield on Interest-Earning Assets

  15.31      (9.00   13.77   

 

(*) Rates include the CER adjustment.
(1) Non accruing loans have been included in average loans.

 

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Table of Contents

The following table shows our consolidated average balances, accrued interest and nominal interest rates for interest-earning assets and interest-bearing liabilities for the fiscal year ended December 31, 2012.

 

     Fiscal Year Ended December 31, 2012 (*)  
     Pesos      Dollars     Total  
     Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
     Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
    Average
Balance
    Accrued
Interest
     Average
Yield/
Rate
 
     (in millions of Pesos, except rates)  

Assets

                      

Government Securities

     5,154        695         13.48         94        2         2.23        5,248        697         13.28   

Loans

                      

Private Sector

     31,552        7,846         24.87         3,645        197         5.40        35,197        8,043         22.85   

Public Sector

     —          —           —           —          —           —          —          —           —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Loans (1)

  31,552      7,846      24.87      3,645      197      5.40      35,197      8,043      22.85   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Other

  2,265      383      16.91      127      4      2.76      2,392      387      16.17   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Earning Assets

  38,971      8,924      22.90      3,866      203      5.23      42,837      9,127      21.31   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Gold

  4,350      —        —        2,799      —        —        7,149      —        —     

Equity in Other Companies

  851      —        —        265      —        —        1,116      —        —     

Other Assets

  4,435      —        —        527      —        —        4,962      —        —     

Allowances

  (1,543   —        —        (105   —        —        (1,648   —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Assets

  47,064      —        —        7,352      —        —        54,416      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities and Equity

Deposits

Checking Accounts

  —        —        —        1      —        —        1      —        —     

Savings Accounts

  5,395      11      0.19      1,274      —        —        6,669      11      0.16   

Time Deposits

  15,125      2,222      14.69      1,586      14      0.91      16,711      2,236      13.38   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Bearing Deposits

  20,520      2,233      10.88      2,861      14      0.50      23,381      2,247      9.61   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Debt Securities

  1,032      186      18.03      3,719      361      9.70      4,751      547      11.51   

Other

  1,153      212      18.39      1,637      64      3.91      2,790      276      9.89   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Interest-Bearing Liabilities

  22,705      2,631      11.59      8,217      439      5.35      30,922      3,070      9.93   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Demand Deposits

  8,922      —        —        615      —        —        9,537      —        —     

Other Liabilities

  7,972      —        —        1,256      —        —        9,228      —        —     

Minority Interests

  569      —        —        —        —        —        569      —        —     

Shareholders’ Equity

  4,160      —        —        —        —        —        4,160      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Liabilities and Equity

  44,328      —        —        10,088      —        —        54,416      —        —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Spread and Net Yield

Interest Rate Spread

  11.31      (0.12   11.38   

Cost of Funds Supporting Interest-Earning Assets

  6.75      11.35      7.17   

Net Yield on Interest-Earning Assets

  16.15      (6.10   14.14   

 

(*) Rates include the CER adjustment.
(1) Non accruing loans have been included in average loans.

Changes in Net Interest Income-Volume and Rate Analysis

The following table allocates, by currency of the underlying asset or liability, changes in our consolidated interest income and interest expenses between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective average yield/rate for (i) the fiscal year ended December 31, 2014 compared with the fiscal year ended December 31, 2013; and (ii) the fiscal year ended December 31, 2013,

 

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compared with the fiscal year ended December 31, 2012. Differences related to both rate and volume are allocated proportionally to the rate variance and the volume variance, respectively.

 

     Fiscal Year 2014/ Fiscal Year 2013,
Increase (Decrease) due to changes in
    Fiscal Year 2013/ Fiscal Year 2012,
Increase (Decrease) due to changes in
 
     Volume     Rate     Net Change     Volume     Rate     Net Change  
     (in millions of Pesos)  

Interest Earning Assets

          

Government Securities

          

Pesos

     790        456        1,246        (231     104        (127

Dollars

     17        (4     13        15        10        25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  807      452      1,259      (216   114      (102

Loans(1)

Private Sector

Pesos

  2,956      1,748      4,704      3,389      133      3,522   

Dollars

  21      5      26      (35   (24   (59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  2,977      1,753      4,730      3,354      109      3,463   

Other

Pesos

  81      219      300      (52   33      (19

Dollars

  7      (10   (3   (1   4      3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  88      209      297      (53   37      (16

Total Interest-Earning Assets

Pesos

  3,827      2,423      6,250      3,106      270      3,376   

Dollars

  45      (9   36      (21   (10   (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  3,872      2,414      6,286      3,085      260      3,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Bearing Liabilities

Savings Account

Pesos

  3      2      5      4      —        4   

Dollars

  —        —        —        —        —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  3      2      5      4      —        4   

Time Deposits

Pesos

  1,328      1,472      2,800      1,100      433      1,533   

Dollars

  5      13      18      (1   4      3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  1,333      1,485      2,818      1,099      437      1,536   

With Other Financial Entities

Pesos

  21      114      135      81      43      124   

Dollars

  14      5      19      (14   (10   (24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  35      119      154      67      33      100   

Notes

Pesos

  226      155      381      222      22      244   

Dollars

  188      46      234      49      30      79   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  414      201      615      271      52      323   

Other liabilities

Pesos

  (1   11      10      (9   5      (4

Dollars

  (2   (1   (3   (39   22      (17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  (3   10      7      (48   27      (21

Total Interest Bearing Liabilities

Pesos

  1,577      1,754      3,331      1,398      503      1,901   

Dollars

  205      63      268      (5   46      41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  1,782      1,817      3,599      1,393      549      1,942   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The increase of Ps.6,286 million in interest income for the fiscal year ended December 31, 2014, as compared to the previous year, is mainly explained by the Ps.3,872 million benefit from the increase in the volume of interest-earning assets representing the 61.6% of such growth, together with the Ps.2,414 million increase in interest rates, representing the 38.4%.

                In particular, the Ps.6,250 million benefit from Peso-denominated assets was mainly due to an increase in volume, mainly as a result of the increase in loans to the private sector (representing 77.2% of the increase). The average volume of private sector loans amounted to Ps.55,704 million for fiscal year 2014, as compared to Ps.44,965 million for the previous fiscal year. Likewise, the increase in interest rates in Pesos was primarily a result of the 357 basis points (“b.p.”) increase in the average interest rate for loans to the private sector, from 25.25% to 28.85%. The Ps.1,259 million increase in interest from government securities was due to an increase in volume equal to PS.807 million and an increase in interest rates (accounting for Ps.452 million), mainly as a consequence of the higher average rate accrued on Lebac and Nobac.

In terms of interest expenses, the Ps.3,599 million increase for the fiscal year ended December 31, 2014, as compared to 2013, is primarily a result of the increase in the interest rate payable on time deposits, which increased from 17.04% to 23.07% (583 b.p.), together with a 30% increase in the volume of time deposits (from Ps.21,782 million in 2013 to Ps.28,418 million in 2014). As a consequence, the interest rate payable on time deposits represented the 52.7% of the net change on time deposits as of the end of fiscal year 2014, as compared to the 28.5% as of the end of fiscal year 2013, while in terms of volume time deposits represented the 47.3% in 2014, lower than

 

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the 71.5% in 2013. The higher amount of notes outstanding accompanied the evolution of the interest bearing liabilities, Ps.414 million in terms of volume and Ps.201 million in terms of interest rate, increases primarily attributable to the issuances of notes by Tarjeta Naranja, Tarjetas Cuyanas, CFA and Grupo Financiero Galicia.

Interest-Earning Assets-Net Yield on Interest-Earning Assets

The following table analyzes, by currency of denomination, the levels of our average interest-earning assets and net interest earned, and illustrates the net yields and spreads obtained, for each of the periods indicated.

 

     Fiscal Year Ended December 31,  
     2014      2013      2012  
     (in millions of Pesos, except percentages)  

Total Average Interest-Earning Assets

        

Pesos

     65,665         50,736         38,971   

Dollars

     4,684         3,424         3,866   
  

 

 

    

 

 

    

 

 

 

Total

  70,349      54,160      42,837   
  

 

 

    

 

 

    

 

 

 

Net Interest Earned (1)

Pesos

  10,687      7,768      6,293   

Dollars

  (540   (308   (236
  

 

 

    

 

 

    

 

 

 

Total

  10,147      7,460      6,057   
  

 

 

    

 

 

    

 

 

 

Net Yield on Interest-Earning Assets (2) (%)

Pesos

  16.28      15.31      16.15   

Dollars

  (11.53   (9.00   (6.10
  

 

 

    

 

 

    

 

 

 

Weighted-Average Yield

  14.42      13.77      14.14   
  

 

 

    

 

 

    

 

 

 

Interest Spread, Nominal Basis (3) (%)

Pesos

  9.41      10.30      11.31   

Dollars

  (2.79   (1.56   (0.12
  

 

 

    

 

 

    

 

 

 

Weighted-Average Yield

  10.13      10.43      11.38   
  

 

 

    

 

 

    

 

 

 

Credit Related Fees Included in Net Interest Earned

Pesos

  224      223      192   

Dollars

  2      6      —     
  

 

 

    

 

 

    

 

 

 

Total

  226      229      192   
  

 

 

    

 

 

    

 

 

 

 

(1) Net interest earned corresponds to the net financial income (“Financial Income” minus “Financial Expenses”, as set forth in the Income Statement), plus (i) financial fees included in “Income from Services - In Relation to Lending Transactions” in the Income Statement,(ii) contributions to the Deposits Insurance Fund included in the item with the same denomination that is part of the “Financial Expenses” caption in the Income Statement, and (iii) contributions and taxes on financial income included in the Income Statement under “Financial Expenses - Others”; minus (i) net income from corporate securities, included under “Financial Income/Expenses - Interest Income and Gains/Losses from Holdings of Government and Corporate Securities”, in the Income Statement,(ii) differences in quotation of gold and foreign currency included in the item with the same denomination that is part of the Financial Expenses/Income caption in the Income Statement, and (iii) the premiums and adjustments on forward transactions in foreign currency, included in the item “Financial Income-Others” in the Income Statement. Net interest earned also includes income from government securities used as security margins in repurchase agreement transactions. This income/loss is included in “Miscellaneous Income/Loss - Others” in the Income Statement. Net income from government securities includes both interest and gains/losses due to the variation of market quotations.
(2) Net interest earned, divided by average interest-earning assets.
(3) Interest spread, nominal basis is the difference between the average nominal interest rate on interest-earning assets and the average nominal interest rate on interest-bearing liabilities.

 

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Government and Corporate Securities

The following table shows our holdings of government and corporate securities at the balance sheet dates stated below, and the breakdown of the portfolio in accordance with the Argentine Central Bank classification system and by the currency of denomination of the relevant securities. Our holdings of government securities represent mainly holdings of Banco Galicia.

 

     Fiscal Year Ended December 31,  
     2014      2013      2012  
     (in millions of Pesos)  

Government Securities

        

Pesos

        

Recorded at Cost plus Yield

     30         396         596   

Bonar Bonds

     —           392         558   

Others

     30         4         38   

Recorded at Fair Value

     1,480         491         99   

Bonar Bonds

     1,437         459         89   

Others

     43         32         10   

Issued by Argentine Central Bank

     7,247         2,077         2,684   

Lebac Unquoted

     3,649         1,110         1,165   

Lebac Quoted

     3,581         949         1,309   

Nobac Unquoted

     —           —           47   

Nobac Quoted

     —           18         125   

Nobac Repurchase Agreement Transactions

     17         —           38   

Lebac Repurchase Agreement Transactions

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Government Securities in Pesos

  8,757      2,964      3,379   
  

 

 

    

 

 

    

 

 

 

Dollars

Recorded at Cost plus Yield

  287      741      229   

Government Bonds

  287      741      229   

Recorded at Fair Value

  966      252      20   

Boden 2015 Bonds

  39      25      11   

Government Bonds

  927      227      9   
  

 

 

    

 

 

    

 

 

 

Total Government Securities in Dollars

  1,253      993      249   
  

 

 

    

 

 

    

 

 

 

Total Government Securities

  10,010      3,957      3,628   
  

 

 

    

 

 

    

 

 

 

Corporate Securities

Corporate Equity Securities (Quoted) in Pesos

  —        —        —     

Corporate Equity Securities (Quoted) in Dollars

  —        30      —     
  

 

 

    

 

 

    

 

 

 

Allowances

  —        —        (1
  

 

 

    

 

 

    

 

 

 

Total Government and Corporate Securities

  10,010      3,987      3,627   
  

 

 

    

 

 

    

 

 

 

In 2014 the increase in our holdings of Argentine government securities denominated in Pesos was attributable to an increase in our holdings of Lebac and Nobac for Ps.7,247 million. The portfolio of government securities denominated in Pesos for securities recorded at fair value reflects Grupo Financiero Galicia’s holdings of bonds issued by the Argentine government due in 2015, 2016, 2017 and 2019 for Ps.75 million, Ps.374 million, Ps.798 million and Ps.190 million, respectively.

Regarding our holdings of government securities denominated in dollars as of December 31, 2014, the increase in securities recorded at fair value includes debt securities of the provinces of Neuquén, Chubut, Buenos Aires and Mendoza, among others. The lower position in securities recorded at cost plus yield in dollars was primarily due to the decrease in securities of the provinces of Neuquén and Chubut.

In 2013 we increased our holdings of Argentine government securities denominated in Dollars, securities recorded at cost plus yield and securities recorded at fair value.

The decrease in our holdings of Argentine government securities in 2012 can be mainly attributed to the decrease in Lebac and Nobac (Argentine Central Bank bills and notes). The portfolio in Pesos corresponding to securities recorded at cost plus yield reflects Banco Galicia’s holdings of bonds issued by the Argentine government due in 2015 (“Bonar 2015 Bonds”) for Ps.558 million.

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

Government Securities - Net Position

The following table shows our net position in government and corporate securities at the balance sheet date, and the breakdown of the portfolio in accordance with the Argentine Central Bank classification system and by the

 

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securities’ currency of denomination. The net position is defined as holdings plus forward purchases and spot purchases pending settlement, minus forward sales and spot sales pending settlement.

 

     As of December 31, 2014  
     Holdings      Forward
Purchases (1)
     Forward
Sales (2)
    Spot
purchases
to be settled
     Spot
sales
to be settled
    Net
Position
 
     (in millions of Pesos)  

Government Securities

               

Holdings Recorded at Cost plus Yield

               

Pesos

     30         —           —          —           —          30   

Dollars

     287         —           —          —           —          287   

Holdings Recorded at Fair Value

               

Pesos

     1,480         21         (90     5         (1     1,415   

Dollars

     966         —           —          2         (35     933   

Securities issued by the Argentine Central Bank

               

Pesos

     7,247         465         (16     94         (76     7,714   

Total Government Securities

     10,010         486         (106     101         (112     10,379   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Corporate Equity Securities (Quoted)

  —        —        —        —        —        —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Government and Corporate Securities

  10,010      486      (106   101      (112   10,379   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Forward purchases include securities granted as collateral.
(2) Forward sales include government securities deposits.

The net position of government securities as of December 31, 2014 amounted to Ps.10,379 million.

The net position of government securities at cost plus yield issued in Pesos, for Ps.30 million, mainly corresponds to debt issued by provinces. The net position of government securities at cost plus yield issued in Dollars amounts to Ps.287 million and can primarily be attributed to debt issued by the province of Entre Ríos and to the Argentine Savings Bond for Economic Development (BAADE), a sovereign bond issued in Dollars by the Government of Argentina designed for financing public investment projects in strategic sectors, infrastructure and hydrocarbons.

The net position corresponding to government securities at fair value in Pesos, in the amount of Ps.1,415 million, mainly corresponds to bonds issued by the Argentine government due in 2016, 2017 and 2019 for Ps.374 million, Ps.785 million and Ps.190 million, respectively. The net position of government securities at fair value in Dollars can primarily be attributed to debt issued by the provinces of Neuquén, Chubut, Buenos Aires and Mendoza.

Regarding securities issued by the Argentine Central Bank, the net position corresponds to our holding of Lebac in the amount of Ps.7,714 million.

 

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Remaining Maturity and Weighted-Average Yield

The following table analyzes the remaining maturity and weighted-average yield of our holdings of government and corporate securities as of December 31, 2014. Our government securities portfolio yields do not contain any tax equivalency adjustments.

Maturity Yield

 
     Total
Book
Value
     Maturing
within 1 year
    Maturing after 1
year but within
5 years
    Maturing after 5
years but within
10 years
    Maturing
after 10 years
 
        Book
Value
     Yield (1)     Book
Value
     Yield (1)     Book
Value
     Yield (1)     Book
Value
     Yield (1)  
     (in millions of Pesos, except percentages)  

Government Securities

                    

Recorded at Fair Value

                    

Pesos

     1,480         87         27.1     1,389         28.8     2         29.4     2         9.1

Dollars

     966         253         19.4     713         5.2     —           —          —           —     

Recorded at Cost plus Yield

                 

Pesos

     30         3         29.7     27         28.6     —           —          —           —     

Dollars

     287         78         6.2     209         7.9     —           —          —           —     

Instruments Issued by the Argentine Central Bank

                 

Pesos

     7,247         7,247         25.6     —           —          —           —          —           —     

Securities Without Quotation

                 

Pesos

     —           —           —          —           —          —           —          —           —     

Dollars

     —           —           —          —           —          —           —          —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Government Securities

  10,010      7,668      25.2   2,338      19.7   2      29.4   2      9.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Corporate Debt Securities

  —        —        —        —        —        —        —        —        —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Portfolio

  10,010      7,668      25.2   2,338      19.7   2      29.4   2      9.1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Effective yield based on December 31, 2014 quoted market values.

Loan Portfolio

Our total loans reflect Banco Galicia’s, the Regional Credit Card Companies’ and CFA’s loan portfolios including past due principal amounts. Personal loans and credit-card loans are typically loans to individuals granted by Banco Galicia, the Regional Credit Card Companies or CFA. The Regional Credit Card Companies’ loans are included under “Credit card loans”, while most of CFA’s loans are included under “Personal loans”. Also, certain amounts related to advances, promissory notes, mortgage loans and pledge loans are extended to individuals. However, advances and promissory notes mostly represent loans to companies. The following table analyzes our loan portfolio, i.e., Banco Galicia’s loan portfolio consolidated with the Regional Credit Card Companies’ and CFA’s loan portfolio, by type of loan and total loans with guarantees.

 

     As of December 31,  
     2014     2013     2012     2011     2010  
     (in millions of Pesos)  

Principal and Interest

          

Non-Financial Public Sector

     —          —          —          1        3   

Local Financial Sector

     193        633        357        326        81   

Non-Financial Private Sector and Residents Abroad (1)

          

Advances

     3,987        3,349        3,098        2,302        979   

Promissory Notes

     16,304        13,323        10,460        6,412        4,534   

Mortgage Loans

     1,661        1,803        1,159        960        950   

Pledge Loans

     500        481        311        202        119   

Personal Loans

     6,996        8,051        7,283        5,786        4,094   

Credit Card Loans

     37,348        27,389        19,279        13,392        9,120   

Placements in Banks Abroad

     261        586        277        66        215   

Other Loans

     1,337        1,237        1,619        2,463        2,082   

Accrued Interest, Adjustment and Quotation Differences Receivable

     969        827        661        421        277   

Documented Interest

     (348     (271     (201     (166     (82
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Non-Financial Private-Sector and Residents Abroad

  69,015      56,775      43,946      31,838      22,288   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross Loans

  69,208      57,408      44,303      32,165      22,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses

  (2,615   (2,129   (1,732   (1,284   (1,038
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

  66,593      55,279      42,571      30,881      21,334   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans with Guarantees

With Preferred Guarantees (2)

  2,695      2,433      1,699      1,441      1,257   

Other Guarantees

  9,463      8,257      6,830      4,866      3,695   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans with Guarantees

  12,158      10,690      8,529      6,307      4,952   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Categories of loans include:

 

  - Advances: short-term obligations drawn on by customers through overdrafts.

 

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  - Promissory Notes: endorsed promissory notes, notes and other promises to pay signed by one borrower or group of borrowers and factored loans.

 

  - Mortgage Loans: loans granted to purchase or improve real estate and collateralized by such real estate and commercial loans secured by a real estate mortgage.

 

  - Pledge Loans: loans secured by collateral (such as cars or machinery) other than real estate, where such collateral is an integral part of the loan documents.

 

  - Personal Loans: loans to individuals.

 

  - Credit-Card Loans: loans granted through credit cards to credit card holders.

 

  - Placements in Banks Abroad: short-term loans to banks abroad.

 

  - Other Loans: loans not included in other categories.

 

  - Documented Interest: discount on notes and bills.

 

(2) Preferred guarantees include mortgages on real estate property or pledges on movable property, such as cars or machinery, where Banco Galicia has priority, endorsements of the Federal Office of the Secretary of Finance, pledges of Government securities, or gold or cash as collateral.

For the fiscal year ended December 31, 2014, Banco Galicia’s loan portfolio before allowances for loan losses amounted to Ps.69,208 million, a 21% increase as compared to the fiscal year ended December 31, 2013, as a result of increases in loans to both individuals and companies by 24% and 18%, respectively.

For the fiscal year ended December 31, 2013, Banco Galicia’s loan portfolio before allowances for loan losses amounted to Ps.57,408 million, a 30% increase as compared to the fiscal year ended December 31, 2012, as a result of increases in loans to both companies and individuals by 29% and 30%, respectively.

Loans by Type of Borrower

The following table shows the breakdown of our total loan portfolio, by type of borrower at December 31, 2014, 2013 and 2012. The middle-market companies’ category includes Banco Galicia’s loans to small and medium-sized companies and the agricultural and livestock sectors while the individuals’ category includes loans granted by Banco Galicia, the Regional Credit Card Companies and CFA. Loans to individuals comprise both consumer loans and commercial loans extended to individuals with a commercial activity.

 

     As of December 31,  
     2014      2013      2012  
     Amount      % of Total      Amount      % of Total      Amount      % of Total  
     (in millions of Pesos, except percentages)  

Commercial Loans

     29,104         42.0         24,572         42.8         19,042         43.0   

Corporate

     8,590         12.4         6,508         11.3         6,257         14.1   

Middle-Market Companies

     20,514         29.6         18,064         31.5         12,785         28.9   

- Agribusiness

     9,289         13.4         7,882         13.7         5,474         12.4   

- Small and medium-sized companies

     11,225         16.2         10,182         17.8         7,311         16.5   

Individuals

     39,649         57.3         31,988         55.7         24,609         55.5   

- Bank

     20,538         29.7         16,322         28.4         12,916         29.1   

- Regional Credit Card Companies

     16,096         23.3         12,439         21.7         9,260         20.9   

- CFA

     3,015         4.3         3,227         5.6         2,433         5.5   

Financial Sector (1)

     455         0.7         848         1.5         652         1.5   

Non-Financial Public Sector

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

  69,208      100.0      57,408      100.0      44,303      100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes local and international financial sector. Financial Sector loans are primarily composed of interbank loans (call money loans), overnight deposits at international money center banks and loans to provincial banks.
(2) Before the allowance for loan losses.

 

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Loans by Economic Activity

The following table sets forth as of the dates indicated an analysis of our loan portfolio according to the borrower’s main economic activity. Figures include principal and interest.

 

     As of December 31,  
     2014      2013      2012  
     Amount      % of
Total
     Amount      % of
Total
     Amount      % of
Total
 
     (in millions of Pesos, except percentages)  

Financial Sector (1)

     455         0.7         848         1.5         652         1.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Services

Non-Financial Public Sector

  —        —        —        —        —        —     

Communications, Transportation Health and Others

  2,886      4.2      2,882      5.0      2,064      4.7   

Electricity, Gas, Water Supply and Sewage Services

  216      0.3      260      0.5      244      0.6   

Other Financial Services

  366      0.5      231      0.4      165      0.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  3,468      5.0      3,373      5.9      2,473      5.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Primary Products

Agriculture and Livestock

  8,178      11.8      7,160      12.5      4,845      10.9   

Fishing, Forestry and Mining

  1,459      2.1      478      0.8      134      0.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  9,637      13.9      7,638      13.3      4,979      11.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer

  39,747      57.4      31,720      55.3      24,168      54.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail Trade

  2,237      3.2      2,326      4.0      1,749      4.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Wholesale Trade

  3,699      5.4      3,075      5.4      2,476      5.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Construction

  709      1.0      707      1.2      594      1.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Manufacturing

Foodstuffs

  2,943      4.3      2,303      4.0      2,615      5.9   

Transportation Materials

  996      1.4      963      1.7      1,041      2.3   

Chemicals and Oil

  2,269      3.3      1,557      2.7      1,140      2.6   

Other Manufacturing Industries

  3,048      4.4      2,898      5.0      2,416      5.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  9,256      13.4      7,721      13.4      7,212      16.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Loans

  0      0.0      0      0.0      0      0.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (2)

  69,208      100.0      57,408      100.0      44,303      100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes local and international financial sectors.
(2) Before the allowance for loan losses.

Consumer loans account for the majority of the loan portfolio, which as of the fiscal year-end represented 57.4% of the total loan portfolio; as compared to the 55.3% for fiscal year 2013 and 54.5% for fiscal year 2012.

As for business activities, the most significant categories during the fiscal year ended December 31, 2014 were loans to the primary production sector, the manufacturing industry and trade (wholesale and retail), with a total portfolio share of 13.9%, 13.4% and 8.6%, respectively.

The most significant growth as compared to fiscal year 2013 occurred in the primary production sector with a 26% increase, in the consumer sector with an increase of 25% and in the manufacturing sector, which increased 20%.

 

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Maturity Composition of the Loan Portfolio

The following table sets forth an analysis by type of loan and time remaining to maturity of our loan portfolio as of December 31, 2014.

 

     Within 1
Month
    After 1
Month but
within 6
Months
     After 6
Months but
within 12
Months
     After 1 Year
but within 3
Years
     After 3
Years but
within 5
Years
     After 5
Years
     Total at
December 31,
2014
 
     (in millions of Pesos)  

Non-Financial Public Sector (1)

     —          —           —           —           —           —           —     

Financial Sector (1)

     73        120         —           —           —           —           193   

Private Sector and Residents Abroad

     38,558        14,724         6,881         8,059         645         148         69,015   

- Advances

     2,718        1,063         205         1         —           —           3,987   

- Promissory Notes

     3,801        5,796         2,453         4,131         112         11         16,304   

- Mortgage Loans

     80        201         301         728         214         137         1,661   

- Pledge Loans

     21        107         121         250         1         —           500   

- Personal Loans

     567        1,710         1,677         2,726         316         —           6,996   

- Credit-Card Loans

     29,178        5,834         2,120         216         —           —           37,348   

- Other Loans

     1,572        13         4         7         2         —           1,598   

- Accrued Interest and Quotation

                   

Differences Receivable (1)

     970        —           —           —           —           —           970   

- (Documented Interest)

     (348     —           —           —           —           —           (348

- (Unallocated Collections)

     (1     —           —           —           —           —           (1

Allowance for Loan Losses (2)

     (2,615     —           —           —           —           —           (2,615
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans, Net

  36,016      14,844      6,881      8,059      645      148      66,593   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Interest and the CER adjustment were assigned to the first month.
(2) Allowances were assigned to the first month as were past due loans and loans in judicial proceedings.

Interest Rate Sensitivity of Outstanding Loans

The following table presents the interest rate sensitivity of our outstanding loans due after one year by denomination as of December 31, 2014.

 

     In millions of Pesos      As a % of Total Loans  

Variable Rate (1)(2)

     

Pesos

     2,371         24.5

Dollars

     52         0.5
  

 

 

    

 

 

 

Total

  2,423      35.0
  

 

 

    

 

 

 

Fixed Rate (2)(3)

Pesos

  7,205      74.4

Dollars

  53      0.5
  

 

 

    

 

 

 

Total

  7,258      74.9
  

 

 

    

 

 

 

 

(1) Includes overdraft loans.
(2) Includes past due loans and excludes interest receivable, differences in quotations and the CER adjustment.
(3) Includes short-term and long-term loans whose rates are determined at the beginning of the loans’ life.

Credit Review Process

Credit risk is the potential for financial loss resulting from the failure of a borrower to honor its financial contractual obligations. Our credit risk arises mainly from Banco Galicia’s, the Regional Credit Card Companies’ and CFA’s lending activities, and from the fact that, in the normal course of business, these subsidiaries are parties to certain transactions with off-balance sheet treatment and associated risk, mainly commitments to extend credit and guarantees granted. See also Item 5.A. “Operating Results-Off-Balance Sheet Arrangements”.

Our credit approval and credit risk analysis is a centralized process based on the concept of “opposition of interests”. This is achieved through the existing division among the risk management, the credit and the origination functions both in retail and wholesale businesses, thus enabling us to achieve an ongoing and efficient control of asset quality, a proactive management of loans with problems, aggressive charge-offs of uncollectible loans, and adequate loan loss provisioning. Apart from that, it includes the follow-up of the models for measuring the portfolio

 

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risk at the operation and customer levels, facilitating the detection of loans with problems and the losses associated thereto, what in turn allows the early detection of situations that could entail some degree of portfolio deterioration and provides appropriate protection of our assets.

Banco Galicia

The Risk Management Division manages the Bank’s risks in a comprehensive manner and follows international best practices. It is independent from other divisions as it reports directly to the Bank’s General Division. This structure reflects the high level of commitment from each of the Bank’s governance bodies to risk management. It also strengthens the independence of management while still keeping management involved in business decisions and focused on managing the risk profile of the Bank by providing them with state-of-the-art tools and systems for identifying, measuring, monitoring and mitigating the risks faced by the Bank.

The mission of the Risk Management Division is comprised of the following activities: (i) actively and comprehensively managing and monitoring the risks assumed by Banco Galicia and its subsidiaries to ensure compliance with the internal policies and regulations in force; (ii) keeping the board of directors of Banco Galicia informed with respect to the risks Banco Galicia faces and proposing how to deal with such risks; (iii) strengthening risk management and fully understanding the risks undertaken by providing a global view of the business; (iv) designing policies and procedures to mitigate and control risks; (v) quantifying the capital required by each business and recommending to the General Division the appropriate allocation and profitability of each risk undertaken; and (vi) facilitating communication regarding dispensations from risk internal policies to Banco Galicia’s General Division, as appropriate, together with a compliance plan.

The Risk Management Division’s responsibilities include: (i) ensuring contingency plans are in place for risks posing a threat to business continuity; (ii) recommending the most suitable methodologies for Banco Galicia to measure identified risks; (iii) guaranteeing that the launching of any new product includes a previous assessment of potential risks involved; and (iv) providing technical support and assisting management with global risk management.

The Risk Management Division handles financial, operational, credit, reputational and strategic risks.

During fiscal year 2014 Banco Galicia created the Compliance Division, which reports to the board of directors of Banco Galicia, responsible for monitoring the Bank’s compliance with laws, regulations and internal policies, in order to prevent economic or penal sanctions and to reduce any reputational impact. It is an independent division that coordinates and assists with the identification, advice, monitoring, reporting and early warning of risks of compliance.

The Prevention and Control of Money Laundering and Funding of Terrorist Activities Division monitors Banco Galicia’s compliance with the regulations set forth by the Argentine Central Bank and with Law No. 25,246, as amended and supplemented, with respect to the concealment and laundering of assets from illegal activities. The Financial Information Unit (the “UIF”), under the supervision of the Ministry of Justice, is in charge of the analysis, treatment and transmission of any information in connection with this risk.

Banco Galicia has policies, procedures and control structures in place related to the features of the various products offered, which assist in monitoring transactions in order to identify unusual or suspicious transactions and reporting such transactions to the UIF. The Anti-Money Laundering Unit is in charge of managing such risk, through the implementation of control and prevention procedures, as well as through communication thereof to the rest of the organization via employee training and incorporation of such risk into handbooks.

Banco Galicia has appointed a director to be responsible for the management of such risk, and has created a committee in charge of planning, coordinating and enforcing compliance with the policies set by the board of directors of Banco Galicia. Such regulations are based on Banco Galicia’s “know your customer” policy, which is implemented and enforced worldwide. The internal and external auditors regularly review management of such risk.

The Credit Division’s mission is to assure the quality of the Bank’s loan portfolio by monitoring the origination of businesses and the optimization of loan recovery in accordance with best practices standards.

 

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This division performs the following functions: credit granting, preventative management, tracking down and classification of customers and recovery of past-due loans.

In order to obtain timely information and to provide a flexible and efficient structure that assists in responding and adjusting to the then current macro and microeconomic variables, the above-mentioned functions, both for companies and for individuals, are under the direction of divisions and departments that report directly to the Credit Division.

The Credit Division has specific departments for complex businesses which include banks, capital market and agri-business, and specific departments for the review and analysis of sectors based on their type of activity and environmental risk.

The analysis and granting in relation to the retail portfolio is made on a centralized basis by the Individuals Credit Approval Division.

Applications for these products, such as credit cards, checking account overdrafts and secured or unsecured personal loans, are automatically assessed through computerized credit scoring systems that take into account different criteria to determine the customer’s credit background and repayment capacity, as well as through granting guidelines based on the customer’s credit history within the financial system (which is verified against the information provided by a company that furnishes credit information) or with Banco Galicia (credit screening).

Credit approval for the corporate loan portfolio is carried out through two specialized teams: The Corporate Credit Approval Division, responsible for credit granting and the Credit Analysis Division, responsible for the analysis of large amount transactions.

Before approving a loan, Banco Galicia performs an assessment of the potential borrower and his/her financial condition. Approvals of loans exceeding a certain threshold amount are analyzed based on the credit line and the customer. For loans below such amount, Banco Galicia uses automated risk assessment systems that provide financial and non-financial information on the borrower and that provide projections based on the financial statements of the borrower and generate automatic warnings about situations that may indicate an increase in the risk.

Banco Galicia performs its risk assessment based on the following factors:

 

Qualitative Analysis Assessment of the corporate borrower’s creditworthiness performed by the officer in charge of the account based on personal knowledge.
Economic and Financial Risk Quantitative analysis of the borrower’s balance sheet amounts.
Economic Risk of the Sector Measurement of the general risk of the financial sector where the borrower operates (based on statistical information, internal and external).
Environmental Risk Environmental impact analysis (required for all investment projects of significant amounts).

Loans are generally approved by the Divisions of Corporate Credit Approval and of Credit Analysis pursuant to set authorization levels. However, loans exceeding a certain amount and loans granted to (domestic or foreign) financial institutions and to related customers are approved by the Credit Committee.

The Customer Credit Recovery Division is responsible for reducing the deterioration of the credit quality of the portfolio under management and also for working with customers on their credit quality for their re-eligibility for loans. It is also responsible for the preventive management of the Bank’s portfolio by using strategic behavior models that help anticipate non-performing credit customers.

The Portfolio Recovery Division covers the court and out-of-court proceedings of customers within the individuals and companies portfolio. Additionally, the division advises on legal aspects to the Credit Division.

 

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The Planning Department is responsible for the strategic vision of the area, defining efficiency ratios and action plans, proposing alternatives which contribute to an ongoing improvement and ensuring the compliance of the established objectives.

It is also responsible for ensuring regulatory compliance in acordance with the regulations passed by the applicable authorities, and for reviewing and proposing changes to Banco Galicia’s internal policies, with respect to both credit granting and recovery of past-due loans. This department consistently interfaces with the Risk Management Division.

Regional Credit Card Companies

Each of the Regional Credit Card Companies maintains its own credit products and limits; however, their credit approval and credit risk analysis procedures are basically the same. Assessment of the credit risk of each customer is based on certain information required, provided by the customer, and verified by the companies, as well as on information on customers’ credit records obtained from credit bureaus and other entities. Once the information is verified, the credit card is issued. There are certain requirements such as age, minimum levels of income (depending on the type of customer, i.e. employee, self-employed, etc.) and domicile area that must be fulfilled in order to qualify for a credit card. Credit limits are defined based on customers’ income. Credit limits may be raised for a particular customer, either at the customer’s request or based on the customer’s past payment profile, at the companies’ discretion or for all customers, due to, among other factors, macroeconomic conditions such as inflation, salary trends or interest rates.

Credit risk assessment, credit approval (the extension of a credit card and the assignment of a limit) and classification (in accordance with the current loan classification criteria defined by the Argentine Central Bank regulations) of the loan portfolio are managed by each company on a centralized basis by a unit that is separate from the sales units. The credit process is described in manuals and Tarjeta Naranja, the largest regional credit card company, has certified all of its processes under the ISO 9001/2000 standard. Credit limits and policies are defined by the board of directors of each regional credit card company.

With regards to recovery of past due loans, the Regional Credit Card Companies and Cobranzas Regionales, a subsidiary of Tarjetas Regionales, manage the early stages of delinquency through their branch personnel and use different types of contact with customers (letters, phone calls, etc.). After 100 days, recovery is turned over to collection agencies that manage out of court proceedings, and if the loan is not recovered, court proceedings could be initiated by other specialized agencies. Cobranzas Regionales supervises the whole process of recovery, including recovery procedures of such collection agencies.

Compañía Financiera Argentina

CFA maintains its own credit products and limits. Assessment of the credit risk of each customer is based on certain information required, provided by the customer, and verified by the company, as well as on information on customers’ credit records obtained from credit bureaus and other entities.

Credit risk assessment, credit approval and classification (in accordance with the current loan classification criteria defined by the Argentine Central Bank regulations) of the loan portfolio are managed by the company on a centralized basis by a unit that is separate from the sales units.

Main Argentine Central Bank’s Rules on Loan Classification and Loan Loss Provisions

General

Regardless of the internal policies and procedures designed to minimize risks undertaken, Banco Galicia complies with the Argentine Central Bank regulations.

In 1994, the Argentine Central Bank introduced the current loan classification system and the corresponding minimum loan-loss provision requirements applicable to loans and other types of credit (together referred to as “loans” in this section) to private sector borrowers.

 

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The current loan classification system applies certain criteria to classify loans in a bank’s “consumer” portfolio, and another set of criteria to classify loans in its “commercial” portfolio. The classification system is independent of the currency in which the loan is denominated.

The loan classification criteria applied to loans in the consumer portfolio is based on objective guidelines related to the borrower’s degree of fulfillment of its obligations or its legal status, the information provided by the Financial System’s Debtors System-whenever debtors reflect lower quality levels than the rating assigned by the Bank-, by the Non-Performing Debtors’ database from former financial institutions and the status resulting from the enforcement of the refinance guidelines. In the event of any disagreement, the guidelines indicating the greater risk level of loan losses should be considered.

For the purposes of the Argentine Central Bank’s regulations, consumer loans are defined as mortgage loans, pledge loans, credit card loans and other types of loans in installments granted to individuals. All other loans are considered commercial loans. In addition, in accordance with an option set forth in these regulations, Banco Galicia prospectively applies the consumer portfolio classification criteria to commercial loans of up to Ps.2.5 million. This classification is based on the level of fulfillment and the situa